Balanced Concessions for the Airport Industry Report

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BALANCED CONCESSIONS FOR THE AIRPORT INDUSTRY DELIVERING WIN-WIN OUTCOMES FOR SUCCESSFUL AIRPORT CONCESSION CONTRACTS Purpose

IATA frequently engages with governments and asset owners who are seeking to put in place airport concession contracts as part of private sector participation programmes. Across multiple jurisdictions these contracts frequently suffer from a range of similar issues, such as inflexible fixed charges, investment plans and concession payments, which undermine the benefit of such programmes to the aviation sector. This Guidance Booklet (“Booklet”) is designed to set out the concept and principles of more Balanced Concessions for the Airport Industry (“Balanced Concession”) for decision-makers in government institutions, airports and airlines who are considering, or are impacted by, airport concession contracts.

This Booklet sets out common issues in airport concession contracts, defines the concept of a Balanced Concession and the opportunities to structure contracts with “win-win” outcomes through aligned incentives for all stakeholders, which include customers, consumers, communities, asset owners and concessionaires. The Booklet then provides practical guidance on how to structure a Balanced Concession that delivers long-term benefits to all stakeholders.

This Booklet builds directly on a broader “Airport Ownership and Regulation” guidance manual, published by IATA in June 2018, which set out recommendations for alternative ownership and operating models in airports globally, improved governmental decision-making, and required regulatory safeguards for privatized airports. It is recommended that that these two documents are read together.

Acknowledgements

This Booklet incorporates inputs from a broad range of senior aviation industry experts, including representatives of IATA and other industry participants. We wish to thank everyone who participated in this study,

Authors

Dorian Reece Global Airport Lead, Deloitte Professional Services (DIFC) Limited [email protected]

Toby Robinson Government and Infrastructure Advisory, Deloitte Professional Services (DIFC) Limited [email protected]

Kartik Sood Deloitte Consulting, Deloitte Touche Tohmatsu India LLP [email protected]

IATA Guidance Booklet Balanced Concessions for the Airport Industry

December 2018 03 Balanced Concessions for the Airport Industry

Contents

EXECUTIVE SUMMARY 04 INTRODUCTION 08 OVERVIEW OF AIRPORT CONCESSIONS 09 AIRPORT CONCESSION STAKEHOLDERS AND THEIR INTERESTS 11 ALIGNING STAKEHOLDER INTERESTS FOR BETTER OUTCOMES 13 GUIDING PRINCIPLES FOR A BALANCED CONCESSION 14 KEY TAKEAWAYS 15 ISSUES IN AIRPORT CONCESSIONS 16 INTRODUCING THE AIRPORT CONCESSION LIFECYCLE 17 ISSUES IN AIRPORT CONCESSIONS 18 LESSONS LEARNED FROM OTHER SECTORS 30 KEY TAKEAWAYS 35 SOLUTIONS FOR A BALANCED CONCESSION 36 GUIDANCE TO DELIVER A BALANCED CONCESSION 37 BALANCED CONCESSION SOLUTIONS ACROSS CONCESSION LIFECYCLE 37 CRITICAL BALANCED CONCESSION SOLUTIONS 41 KEY TAKEAWAYS 60 APPENDICES 62 1. TYPICAL PPP AND CONCESSION MODELS AND AIRPORT SECTOR ARCHETYPES 62 2. MAPPING STAKEHOLDER INTERESTS IN AN AIRPORT CONCESSION 64 3. ISSUES AND SOLUTIONS ACROSS CONCESSION LIFECYCLE 68 4. QUALITATIVE BIDDING FRAMEWORK 74 5. GLOSSARY 76 04 Balanced Concessions for the Airport Industry

Executive Summary

Need for Guidance on Concession Models This Booklet maps the key interests of all stakeholders to the concession model to identify where interests in the Airport Industry align or misalign. It is clear that in many cases there is not a fundamental misalignment of interests of different In response to a lack of clear guidance for governments stakeholders; the Balanced Concession concept on airport ownership and operating models for the demonstrates that there are a number of opportunities aviation industry, IATA published a guidance manual to align stakeholder interests and structure concession which explored airport ownership and regulation (“Airport 1 contracts with “win-win” outcomes for customers, Ownership and Regulation” ). The manual highlighted consumers and communities, as well as the asset owners opportunities for better decision-making when and concessionaires. governments address changes in ownership, financing and management of airports, towards a greater role for the The Balanced Concession demonstrates opportunities private sector. to move from a “vicious cycle”, based on fragmented relationships, to a “virtuous cycle” which benefits the IATA frequently engages with government and asset aviation industry and increases public value (see Figure owners who have elected to adopt a Public Private 5, “Illustrative Vicious and Virtuous Cycles in Airport Partnership (“PPP”) or a concession contract to be the Concessions”, on page 13). preferred model as part of a Private Sector Participation (“PSP”) program. As a result, IATA is often faced with a Taken together, four guiding principles are identified which common set of questions in the structuring of these characterize a Balanced Concession: contracts, although typically with local market nuances which also need to be considered. 1. Collaboration Within airport concessions there can often be an ‘agency 2. Balanced Risks and Rewards problem’ whereby the interests of the contracting parties, the government and concessionaires, take 3. Transparency and Information Sharing precedence over those of other stakeholders, giving rise to a number of issues. As airport concessions continue 4. Mutual Interest to be developed, delivered and re-negotiated, it is clear that there is an ongoing requirement from governments for specific guidance to optimize concession contracts Issues in Airport Concessions and learn lessons from the successes and failures, and to provide support to key decision makers faced with In many concessions, there are points of dispute or defining the optimal outcome. disproportional benefit to specific stakeholders. High concession payments, excessively long agreements, and fixed charges are common examples. These may be Introduction to Balanced Concessions accompanied by fixed investment or quality targets in for the Airport Industry the contract which cannot meet market needs over the longer run. In turn, these lead to sub-optimal incentives This Booklet addresses this need by defining the concept to circumvent regulation or use contractual loopholes to of a Balanced Concession, which represents an evolution maximize profit. Not agreeing on investment and quality from current general practices, in order to develop airport objectives with stakeholders can lead to over- and under- concessions which are responsive to the needs of all investment, limited information sharing, and inefficiency, aviation stakeholders and build “win-win” outcomes for all all of which strain the dialogue between airports and concession counterparties. the people and communities they serve. Many of these issues stem not from the concession’s existence, but The concept of a Balanced Concession is intended to from its implementation without sufficient stakeholder define new ways of approaching concession contracts engagement with a view to achieving alignment. based on lessons learned within the airport sector and other comparable industries, and a wider stakeholder To assess the issues that arise in airport concessions, this perspective. It is also intended to better-inform decision Booklet sets out a framework for the lifecycle of an airport makers with the options available when structuring concession. This framework comprises six key elements concessions and managing the trade-offs different that span the life of a concession, from initial planning and concession terms can present. initiation of a concession contract through to termination

1 www.iata.org/policy/infrastructure/Documents/Airport-ownership-regulation-booklet.pdf 05 Balanced Concessions for the Airport Industry

and transition from an existing contract. Some of these critical junctures to deliver a Balanced Concession (as are sequential but others are ongoing requirements well as the most risk for a failure to do so) are in the early throughout a concession life: stages prior to and at the start of a concession, and in the late stages prior to termination and transition. • Initial Planning and Concession Design This is not to discount the importance of the life of the • Airport Design, Development and Construction concession and the need for regular review and rebasing of charges and capital requirements; it is assumed • Airport Operations and Management throughout this Booklet that the regulatory function will be fit-for-purpose to provide the necessary safeguards • Pricing of Airport Services through effective forms of economic oversight and regulation. This should be implemented by governments • Ongoing Capacity Augmentation as a priority, and a Balanced Concession does not reduce this requirement. However, there is recognition that where • Termination and Transition effective economic regulation does not exist, or is not fit for purpose, decision makers need to carefully consider Given the range of issues and failures it is evident that how they seek to provide necessary protections in the there is a need to detail “best practice” guidelines for concession structure, whilst maintaining the flexibility structuring airport concessions that align the interests to adopt regulation when introduced in the life of the of all key contractual parties and broader stakeholders, concession. including: This Booklet provides solutions to areas where airport 1. Government / Asset Owners concessions can be more balanced to present win-wins for all stakeholders while also addressing the most critical 2. Concessionaires junctures. These can be categorized into seven main categories which are further detailed overleaf: 3. Regulators • Selection of Airport Concessionaires 4. Customers • Determination of Concession Length 5. Consumers and Passengers • Concession Payments and Charges 6. Communities • Super-Profit Protection These stakeholders and their interests are defined in detail in the “Airport Concession Stakeholders and Interests” • Consultation Processes section on page 11. • Capital Planning and Execution

Solutions for a Balanced Concession • Continual Improvement and Airport Service Quality Airport Ownership and Regulation sets out key safeguards of public value in a concession project. These include IATA and the Balanced Concession a competitive and transparent transaction process, assessment of bids on balanced criteria, and ensuring Overall IATA supports efforts to facilitate appropriate the key terms of any concession contract underpin investment in airport infrastructure, and is committed to improvements in efficiency, quality of service, and securing the best value outcome for the aviation industry appropriate investment in the airport for the benefit of as a whole. Airports and airlines succeed or fail together, airlines and consumers. It also provided an overview of and the timely delivery of cost-efficient infrastructure some key areas to consider in concession agreements. and airport services is good for everyone, whether This Booklet seeks to go further and to provide practical government, airport concessionaires, airlines or the guidance on how to structure a Balanced Concession consumer. and address the issues identified, and provide practical guidance and tools required by government to help IATA is often asked to act as an effective proxy for airport answer key questions where there is significant public customers, and to provide specialist technical expertise value at risk. to ensure the delivery of Balanced Concessions from planning and procurement and throughout the concession It is recognized that there is no “one size fits all” solution, lifecycle. As such, IATA welcomes the opportunity to with individual airport requirements and markets varying support and advise governments to ensure better significantly, and the optimal concession design needs concession solutions for the aviation industry as a whole to be developed with key stakeholders and potential and the economies they serve. private sector counterparties. Whilst there are important considerations across the concession lifecycle, the most 06 Balanced Concessions for the Airport Industry

Road Map to a Balanced Concession

Building on the experience of successes and failures of concession contracts, governments and other stakeholders are encouraged to adopt the Balanced Concession model. Critical solutions that should be adopted for a Balanced Concession include:

Selection of Airport Concessionaires Super-Profit Protection

□□ The selection of concessionaires should be based on □□ Contractual mechanisms to share and protect against a balanced scorecard approach and not on financial excess profit can incentivize collaboration between evaluation alone. concessionaires, government and consumers to improve performance and improve financial outcomes □□ The evaluation model and specific mechanics should for all stakeholders. be defined in the government business case to justify the preferred approach. □□ The success of a profit sharing contractual mechanism is dependent on open book accounting □□ Involvement of customers and industry stakeholders and transparency with appropriate governance in informing the development of bidder selection processes embedded within the contract. criteria and evaluation is critical. Consultation Processes □□ Expert panels should be involved in evaluation, with benefits to inclusion of customers and other key □□ Mechanisms for consultation and dispute resolution stakeholders to the concessionaire selection. between concessionaires, customers and consumers need to be sufficiently-defined within concessions or Determinants of Concession Length their regulatory frameworks.

□□ The optimal concession length should be determined □□ Consultation and collaboration between and justified through the government business case. concessionaires and customers at all stages of the concession lifecycle, from capital investment planning □□ Concession payments should be justified and should to operational decisions, can generate significant not be a primary variable to determine concession benefit for all. length. □□ Consultation processes and outcome-based airport □□ Governments should also consider the ultimate service level agreements should be embedded within benefit the airport will create for the wider economy concession contracts. once it reverts to government ownership at the expiry of the concession. □□ Concession contracts should require a business case for capital investment, to be agreed by all parties. □□ Reversionary value of the airport to the government should be incorporated into the government business □□ IATA’s publications on consultation and collaboration case for the granting of the concession. are recommended for government decision-makers.

Concession Payments and Charges

□□ Governments should implement effective economic oversight and regulation ahead of the concession.

□□ Methodologies for setting charges should be in accordance to ICAO’s policies and building block ethodology.

□□ Levels of concession payments to government should be justified based on services and a detailed value for money assessment.

□□ Under this principle, concession payments should not be the primary bid parameter. 07 Balanced Concessions for the Airport Industry

Capital Planning and Execution Continual Improvement and Airport Service Quality

□□ As airport users, airline customers should be involved □□ Concession contracts should be outcome-focused in defining the project’s requirements prior to the and include frameworks for airport service level tendering process, and also in the evaluation of agreements and specify mechanisms to incentivize bidders’ concept designs. continual improvement and adjustment to service levels. □□ During the iterative stages of airport design to execution of capital investment plans, continued □□ IATA’s “Airport Service Level Agreement (“SLA”) – consultation with customers can provide further Best Practice” policy guidance document includes benefits to address efficiency and service alignment. commentary on best practices that should be considered. □□ Capital investment plans should not be overly-rigid within the concession contract to avoid restricting innovation through collaboration with stakeholders.

□□ Fixed future capital investment during the concession should not be pre-defined in the concession contract.

□□ There should be contractual requirements for regular traffic forecast reviews, with a formal review every five years as a minimum, and an annual check.

□□ A competitive process should be required for the procurement of construction contractors and sub- contractors to ensure arms-length and best value commercial arrangements.

□□ Contractual mechanisms should be in place to incentivize late-life capital investment towards the end of the concession term.

□□ Once there is an agreed design freeze for any capital investment, the concessionaire should be responsible for delivery within agreed costs. 08 Balanced Concessions for the Airport Industry

Introduction

This Booklet builds on guidance within IATA’s Airport Ownership and Regulation manual to identify solutions to better define and deliver airport concessions.

There are a range of different concession models which may be applied depending on the specific circumstances and requirements for an airport, and government’s strategic objectives.

The commercial arrangements included in a concession contract are complex, and how they are specified will have a material impact on all stakeholders, not only government and the concessionaire.

Given the above, this Booklet seeks to establish the concept of a Balanced Concession and identify where it can lead to improved outcomes for the aviation industry as a whole, and its stakeholders. 09 Balanced Concessions for the Airport Industry

Scope of this Guidance Booklet This work on the Balanced Concession does not seek to replace, but to go further than the Airport Ownership and As identified inAirport Ownership and Regulation, there Regulation report in exploring how concession models has been a trend in moving away from direct government might be best-applied. This builds on the preceding ownership, financing and management of airports, guidance, and it is recommended that both documents towards a greater role for the private sector, particularly as are read together. For example, this work assumes that airports have evolved from being infrastructure providers a concession model has been selected as the preferred to multi-faceted businesses. solution; the Airport Ownership and Regulation study outlined the process required to determine this. The Airport Ownership and Regulation manual described the spectrum of ownership and operating models, drawing This is intended to be a timely and relevant contribution to on a body of existing literature on infrastructure assets, existing guidance on airport concessions for government and airports in particular. These models ranged from and other decision-makers. government-ownership models, government-ownership models incorporating different levels of PSP (for example, in the form of corporatization or management contracts), Overview of Airport Concessions through to models with degrees of private-sector ownership, including PPP and concession models, as set As described in Figure 1, service and management out in Figure 1 (“Alternative Ownership and Operating contracts are considered government-owned models Models”). The manual also set out recommendations for with PSP. Although these can be included within the improved governmental decision-making, and required broadest definition of PPP, this Booklet takes a focused regulatory safeguards for privatized airports. view of airport concession models as instances where a government has granted rights to operate an airport and However, whilst Airport Ownership and Regulation control one or all of the airport’s activities for a specific set out best practice guidance for the selection and period of time. Concessionaires have financial risk and implementation of an ownership and operating model, it reward in the successful management and operation is by necessity a broad set of guidance. IATA frequently of these activities over that tenure. At the end of the engages with government and asset owners who contract period, the asset typically reverts to, or is granted have elected to adopt a concession contract to be the to, the government, at which point the government can preferred model as part of a PSP program. As a result, determine its preferred ongoing ownership and operating they are facing a common set of issues and challenges model. in the structuring of these contracts, although typically with market-specific nuances which also need to be There are a range of concession models covering a broad considered. As airport concessions continue to be scope involving the role of the private sector in providing developed, delivered and re-negotiated, it is clear that development (design and build), financing, operations and there is a requirement from government for specific maintenance services, as well as the ultimate transfer of guidance to optimize concession contracts and learn the airport asset. These models can be differentiated by lessons from successes and failures to date with the the scope of the agreement, transfer of risk and reward ultimate aim of providing support to key decision makers to the private sector, the requirement to finance capital faced with defining the optimal solution. investment, and the control and ownership of assets.

This Booklet addresses this need by defining the concept Appendix 1 (“Typical PPP and Concession Models and of a Balanced Concession, designed to be applied to Airport Sector Archetypes”) sets out a table summarizing bothFigure greenfield . andAlter brownfieldnativ airporte Ownership concession and Opethese modelsratin andg Models how they are differentiated by private arrangements, which is responsive to the needs of all sector responsibility, as well as identifying the typical aviation stakeholders and builds “win-win” outcomes for government requirements each model seeks to address. all concession counterparties, and provides practical guidance to deliver such a concession.

Figure 1: Alternative Ownership and Operating Models

Government—Owned Government—Owned with Private Sector Participation Privately—Owned or Operated

Government Trading Not-For-Profit Alternative Majority Alternative Service Management Management PPP / Department / Entity / Corporatization (Public Value Equity Sale / Finance Contract Contract Contract Concession Ministry Agency or Private) Capture Divestiture

Operating Models can be Alternative Ownership used to augment Ownership Models to PPP Models further to meet and Privatization Strategic Objectives 10 Balanced Concessions for the Airport Industry

These models include: short-term financial objectives in the form of capital receipts and concession fees, within the parameters • Design-Build-Operate (“DBO”) of concessionaires’ return requirements. However, • Build-Operate-Own (“BOO”) determining concession length to meet this objective may • Built-Operate-Transfer (“BOT”) not fully consider the impact on all stakeholders to the • Built-Operate-Own-Transfer (“BOOT”) contract, such as the need for flexibility in infrastructure • Design-Build-Finance-Operate-Maintain (“DBFOM”) planning, or even the potential value of the asset when • Operations and Maintenance (“O&M”) it reverts back to the government at the expiry of the concession. Further, Appendix 1 also provides archetypal cases in which each model might be most appropriate to the Additionally, there are a number of choices that need to be airport sector, subject to determining a concession as made in the structuring of a concession contract that will the preferred model in the first instance. The selection impact market interest from concessionaires, government, of model is typically dependent on the objectives and other stakeholders to a concession contract, that governments are seeking to achieve; the Airport including customers, consumers and communities. Ownership and Regulation report set out a number of strategic objectives sought by government when pursuing Figure 3 (“Indicative Airport Concession Commercial airport PPP or privatization initiatives. These are set out Structure”) provides a summary of how the commercial in Figure 2 (“Strategic Objectives for Changes in Airport arrangements supporting a long-term airport concession Ownership and Operating Models”). model are typically structured. This figure summarizes a typical greenfield airport structure (suitable, for example, for Government’s specific requirements and objectives a DBFOM model), although a similar structure is applied to can determine the concession type and contractual brownfield airport concessions requiring capital investment. provisions in a number of ways. For example, greenfield airport developments with significant capital spend For implementation of the project, a project company or and construction requirements and a constraint on Special Purpose Vehicle (“SPV”) is generally established government funding and management capability for the delivery of the project. The SPV holds the may drive a preference for a longer-term concession concession agreement with the government or asset agreement. Longer contracts may better match the long- owner, and is responsible for design and build, arranging term nature of capital investments, and create incentives financing for capital investment and working capital, for efficient planning of capital investment, whole lifecycle and operations and maintenance. All project cash flows costing and thorough asset management. (revenues, capital costs, operating costs and financing costs) are attributable to the SPV. The promoters of the There is concern that historically the length of concession SPV provide equity and typically enter into financing and contracts that have been awarded may not be justified security arrangements to raise debt to meet the capital basedFigure on a balanced. St rviewategic of the core Ojecti objectivesves above, for Chaexpenditurenges in requirements Airport forOwnership the project. norand supported Ope rbyating appropriate Models analysis to consider the trade-offs inherent in concession length decisions. Once the airport commences its operations (in the Contracts with a long tenure may maximize government case of a greenfield airport), the SPV collects revenues

Figure 2: Strategic Objectives for Changes in Airport Ownership and Operating Models

Revenue Return Capital Receipts Profile for Government for Government

Financial New Sources of Capital Financing Private Finance Objectives Efficiency

Macro- Economic Management Objectives Objectives

Efficient Sector Domestic Strategic Objectives Improved Commercial & Government Sector Efficiency Capital Projects Economic Customer Operational Control Governance & for Changes in Airport Efficiency Impact Experience Efficiency & Regulation Competitiveness Ownership and Operating Models 11 Balanced Concessions for the Airport Industry

by levying charges on the customers (airlines) and Therefore, the scope and commercial arrangements generating revenues from consumers (passengers) included in the concession contract will have a material and real estate rental. There are a range of regulatory impact on all stakeholders and structuring a Balanced frameworks and nuances that determine charges; in broad Concession that benefits the aviation ecosystem needs terms, under single till regulation, all airport activities to consider the risks, rewards, issues and incentives that (including aeronautical and non-aeronautical) are taken arise for different stakeholders. into consideration when determining the level of airport charges. By contrast, under the dual till principle only aeronautical activities are taken into consideration 2. Airport Concession Stakeholders Concessionaires may also have a right to generate returns from investment in real estate development, depending on and their Interests the terms and scope of the concession agreement. Airport concessions typically represent a contractual During the concession period, the concessionaire relationship between the government as the asset owner continues as required to undertake necessary capital and the private sector concessionaire. This can create investment to expand the airport, as well as managing the an agency problem whereby government is expected operations and maintenance of the existing facility. At the to act on behalf of customers and consumers who are end of the concession, the agreement terminates and the materially impacted by the terms of the concession. There airport transfers back to government. is a risk that the interests of the contracting parties take precedence over those of other stakeholders, including The key point to note is that this structure is highly airline customers of the airport, who commonly have a interdependent and requires a fine balance to meet limited role in contributing to the concession arrangement the requirements of all stakeholders. These include despite being directly affected by it. the required levels of shareholder return, requirements of lenders (for example, debt service coverage ratios), The key stakeholders in an airport concession are concession payments to government, and charges and presented in Figure 4 (“Airport Concession Stakeholder costs borne by customers and passengers for services Overview”) below, alongside their key areas of interest. to their markets. For example, all things being equal, an increase in concession payments will increase required These include: revenues. By contrast, including real estate revenue within the scope of the concession may provide opportunities • Government / Asset Owner for the concessionaire to increase concession payments The grantor of the PSP contract or concession. In the Figureto government . orIndic reducea chargestive Airport to customers Concession and Commercialcontext of the Balanced Str Concessionucture this is typically consumers. the government entity which is the counter-party to the contract, and to whom the asset will typically revert at the end of the contract term.

Figure 3: Indicative Airport Concession Commercial Structure

Government / Asset Owner Regulator Economic Shareholder Regulation Agreement

Equity Finance Shareholders Aeronautical Concession Dividends Revenue Payments (Fees / Concession Customers (Airlines) Agreement Capital Payment / Lease Payments) Credit Enhancement, Risk Guarantees and Insurance

Interest & Non- Principal Aeronautical Repayment Project Company / Revenue Consumers Lenders* Special Purpose Revenue (Passengers) Debt Finance Vehicle (“SPV”)

Financing and Security Agreements

Construction Services Real Estate Revenue Real Estate Payments Payments Development * Sources of debt finance can fall into a Construction O&M number of different categories, and may be Contract Agreement supported by a range of financial products, such as credit enhancement. These sources may include, for example, listed and private Contractors Key: placement bonds, commercial bank debt, Contractors (e.g. Operation multilateral bank debt (for example, (e.g. Construction) Cash Flow development banks), corporate debt, and and Maintenance) subordinated debt. Mutual Contract / Agreement

Regulation

2 www.iata.org/policy/Documents/single-till.pdf 12 Balanced Concessions for the Airport Industry

• Concessionaire Key areas of interaction between the interests of different The operator/controller of the asset under the parties include: concession contract. Within this category are considered the lead sponsor, but also other • Concession Payment consortium members such as financiers, construction This is a financial payment or series of financial contractors, and other specialist sub-contractors. payments from the concessionaire to government in exchange for services and/or the right to the • Customer concession. This may be taken in the form of fixed Passenger airlines and cargo carriers. The users of or variable (for example, as a percentage of revenue) the airport facility and the parties which are directly concession fees or lease payments, or in the form impacted by the services and costs of airport as a of up-front capital receipts. Governments frequently result of the concession. seek to increase this figure or accelerate the timing of payments to meet fiscal or budgetary objectives; • Consumers and Passengers however, this can have a negative impact on other Travelling public, cargo operators, and other users stakeholders and indeed a government’s wider of public airport services which rely on efficient and objectives through increased levels of charges, functional access and connectivity. reduced service quality, or reduced positive impact on public interest. In addition, regulatory frameworks • Regulator with inadequate protections may allow high levels of Independent entity charged with economic regulation concession payments to translate directly into higher (and potentially safety regulation) and safeguards to charges without any fundamental change to the prevent market abuse, secure efficiencies, and ensure service provided. service quality. • Service Quality • Communities Customers, consumers and passengers are Impacted stakeholders at a local, regional, national and predominantly interested in an appropriate level of global level, with a particular focus on Environmental, service and infrastructure provision for a fair level of Social and Governance (“ESG”) factors. Such charges, reflective of market-specific customer and stakeholders include employees, local communities consumer factors. This interest may conflict with impacted by noise and air quality, and broader Non- the interests of government to increase concession Governmental Organizations (“NGOs”), national and payments (which will increase charges), or the Figure . Airport Concessiosupranational norganizations Stakeholder concerned Overview with issues interests of concessionaires to increase their return such as security, climate change and trafficking. (or reduce the level of service, and therefore cost). However, appropriate service quality is typically 3 aligned with public interest objectives associated with Figure 4: Airport Concession Stakeholder Overview economic growth and job creation.

• Level of Charges All other factors being equal, a concessionaire will be motivated to increase the level of charges and therefore profitability of the concession until the point where such increases would significantly affect Government / Concessionaire Asset Owner Concession traffic and reduce returns. Further, higher levels of Payment charges are required to compensate for increases in concession payments, “gold plated” service quality or capital expenditures in excess of requirements, or instances of “overbidding” where concession

Service bidders are overly aggressive with an expectation Public Quality Level of that charges can be increased or renegotiated. Due Interest Charges to the high level of market power enjoyed by airports, robust forms of economic regulation are required to s ie safeguard the interests of customers, consumers R Customers, t e i g Consumers and n and passengers and ensure a balanced approach is u u la Passengers m t m applied when defining the level of charges, service o o r C standards and infrastructure requirements, ideally in broad consultation with all relevant stakeholders.

• Public Interest Public interest can be served through the positive macro-economic impact of an airport, including domestic economic impact through trade connections and export-led trading, tourism and

3 Source: Asian Development Bank, “Developing Best Practices for Promoting Private Sector Investment in Infrastructure”, 2000. Abridged and amended. 13 Balanced Concessions for the Airport Industry

maximizing domestic value creation (which in Aligning Stakeholder Interests turn may generate increased future tax receipts for government). Airports enable air travel which for Better Outcomes connects people and markets, whilst needing to remain conscious of its environmental and social In many cases the issues identified do not arise from impacts. The increasingly visible positive impacts a fundamental misalignment of different stakeholder which aviation creates for economies is at risk interests. There are also many areas of alignment of being undermined by increases in concession between different stakeholders to an airport concession. payments and charges to levels which adversely Primary amongst these is a common interest in a well- impact the industry and the wider economy. functioning airport ecosystem that enables the continued Recognizing that governments have a responsibility development of the economies and the communities the for broader strategic objectives than simply aviation industry serves. maximizing concession payments, appropriate cost benefit analysis should be applied to establish where Where it is possible, aligning interests through a well- reducing concession payments and charges can structured concession contract that considers the wider create a broader social and economic benefit. stakeholder landscape can create “win-win” outcomes that benefit all stakeholders. Where interests cannot be From this simplified representation of key interests within fully-aligned, better mechanisms for engagement and an airport concession, it is clear that airport concession consultation between stakeholders can help to ensure contracts are highly complex with a broader impact than fairer outcomes. the transacting parties. Competing interests between different stakeholders, and even within a single entity, Figure 5 (“Illustrative Vicious and Virtuous Cycles in cause issues seen in airport concessions and may Airport Concessions”) provides an example of how “win- negatively impact the overall performance of the airport win” outcomes can manifest through an alignment of ecosystem. interests and create a virtuous cycle of mutual benefit, rather than a vicious cycle which reduces the overall A more detailed range of interests by stakeholder are performance of the airport system and negatively impacts further assessed in Appendix 2 (“Mapping Stakeholder all stakeholders. Given the complexity of an airport Interests in an Airport Concession”) on page 64. ecosystem and airport concessions there are multiple ways in which these vicious and virtuous cycles can start and manifest, and this example is therefore illustrative of some of the interactions rather than comprehensive.

Figure . Vicious and Virtuous Cycles in Airport Concessions Figure 5: Illustrative Vicious and Virtuous Cycles in Airport Concessions

Prioritise Long-Term Socio-Economic Gains

Vicious Cycle – Unbalanced Concession Virtuous Cycle – Balanced Concession

No Collaborative Fit-For-Purpose Reduced Decision-Making Collaboration in Efficient Capital Attractiveness to Design and Delivery Customers / Consumers Procurement

Government Sub-Optimal Unable to Capital Appropriate Charges and Step-In Higher Investment Lower Capital Service Levels Concession Delivery and Higher Incentives to Fees Operational Risk Charges Invest

Longer Higher Concession Charges Financing Length Required Efficiency Increased Attractiveness to Financing Customers / Consumers Inefficiency Improved Financial Investor Viability Uncertainty Prioritise Short-Term Financial Gains

Airport System Performance Negative Socio-Economic Impact Positive Socio-Economic Impact 14 Balanced Concessions for the Airport Industry

In the vicious cycle, a focus on short-term financial gains, Four guiding principles are at the heart of defining the with government requiring a high concession payment Balanced Concession, differentiating it from typical (or “gold plated” and/or excessive CAPEX) can lead to a concession arrangements and setting the ground rules for higher level of charges required by the concessionaire. This Balanced Concession solutions. adversely impacts airline customers who are likely to reduce capacity as a result of reduced demand from passengers Guiding Principle 1 — Collaboration resulting from increased levels of charges levied on customers and consumers, resulting in reduced economic Airports are extremely complex ecosystems and no value, and ultimately reduced long-term economic and operational decisions can be taken in isolation to the financial gains. In this cycle, long and rigid concession terms broader impact on other stakeholders. Early involvement may mean government are unable to step-in. of relevant stakeholders in planning and procurement can help ensure a fit-for-purpose solution is identified and By contrast, a virtuous cycle whereby a concession is ultimately adopted. After a competitive tendering process designed which balances impacts and appropriately prices has secured best value for money for all stakeholders, services and charges drives passenger demand and collaboration must be in place to ensure the ecosystem economic connectivity leading to enhanced economic remains viable and competitive. value. In this cycle, government is not needed to step in. As a supplier to the airlines and cargo carriers, the concessionaire’s own businesses can only benefit Guiding Principles from being responsive to changing customer needs. The Balanced Concession needs to empower stronger for a Balanced Concession partnership models and incentivize collaboration across the planning, designing and development phases, as A “Balanced Concession” is an approach that defines new well as in airport operations and management. Whereas ways of developing and delivering airport concession many of the most successful businesses today succeed contracts based on a wider stakeholder perspective than because they are customer-centric, firms that are not in typically used. Rather than believing stakeholders have fully competitive markets, as in the airport sector, risk different and adversarial objectives across the airport mistaking customers’ high cost of switching for customer concession lifecycle, the Balanced Concession identifies satisfaction and misreading customer needs. similar and aligned interests to target a “virtuous cycle” in airport concessions which benefits the aviation industry From early engagement with airlines prior to concession as a whole, mitigating risk and delivering innovation, better tendering to inform forecasts and define concession public value, and an improved consumer experience. scope and requirements, through to the tendering Taking this alternative perspective can help design process itself and refining the concept design with the concessions that benefit all airport stakeholders, and concessionaire, collaboration with customers can help recognizes the long-term benefit of interaction between ensure a cost efficient, fit-for-purpose concession Figure [x]. Key Tairports,hemes their for customers, a Balanced consumers Conce ands communities.sion and facilities design. IATA’s position paper, “Airport Infrastructure Investment – Best Practice Consultation”, sets out how effective consultation and best practice Figure 5: Guiding Principles for a Balanced Concession governance can lead to mutual benefits through optimizing a project’s cost and efficiency.

Guiding Principle 2 — Balanced Risks and Rewards

Collaoration Airport operators and customers are highly interdependent and have a shared goal of creating and operating a functional, cost-efficient asset that maintains an appropriate level of service.

The Balanced Concession seeks to achieve this by BALANCED properly incentivizing asset owners, concessionaires and Transparency CONCESSION Balanced Risk and Information customers through mitigation of risks by the party best and Reward Sharing placed to manage them, to better-enable improvements in efficiency, technological advancements and other positive changes to the status quo.

While the concessionaire should always be appropriately remunerated for efficiently made investments, concessions should introduce provisions to allow for Mutual Interest sharing of benefits, and incentives to generate benefits in collaboration with other stakeholders, on an ongoing basis throughout the concession life. An effective economic regulatory framework should be able to address this. 15 Balanced Concessions for the Airport Industry

Guiding Principle 3 — Transparency and Information Key Takeaways Sharing • There are a range of different concession models The modern airport is increasingly becoming data driven which may be applied depending on the specific with advanced airports being the ones that capture all circumstances and requirements for an airport, relevant data to inform critical operational and commercial and a government’s strategic objectives. The decisions. Transparency and seamless information commercial arrangements and incentives included sharing between members of an airport ecosystem allows in a concession contract are complex, and how concessionaires and customers to act in a communally they are specified will have a material impact on advantageous manner and improve efficiency and all stakeholders, not only government and the effectiveness of both day-to-day operational and strategic concessionaire. decisions. By placing emphasis on the long-term benefit of shared information, data and processes, the Balanced • Airport concessions suffer from an agency problem, Concession will improve the performance of the aviation with the contractual arrangements developed industry. predominantly by government and concessionaires with relatively limited reference to critical impacted Guiding Principle 4 — Mutual Interest stakeholders, including customers, consumers and communities. Concession agreements typically focus on the asset owner and concessionaire’s interests. However, the • Historically this has led to missed opportunities to obligations and actions or inactions of the concessionaire align interests and create better “win-win” outcomes and/or asset owner can detrimentally affect the interests for all impacted stakeholders, including government of other stakeholders. Customers, consumers and and the concessionaire. These missed opportunities community interests can benefit from well-defined mean economic, social and financial value is lost, and concession contracts and service level agreements a “vicious cycle” rather than “virtuous cycle” created. (“SLAs”) that hold the concessionaire accountable for under-performance, as identified in IATA’s policy guidance • Government should consider the interests of and on Airport Service Level Agreements (“Airport Service include a wider group of stakeholders in developing Level Agreement – Best Practice”). concession structures, procuring and managing concession contracts. It is clear there is a need to The Balanced Concession provides a new focus on detail “best practice” guidelines for structuring airport appropriately safeguarding the rights and interests of all concession contracts that builds on the alignment of stakeholders for the long-term and mutual benefit and interests of all key contractual parties and broader interest of the aviation industry, as a complement to rather stakeholders. than a replacement for effective economic regulation. A concessionaire that acts in the customer and consumers • A Balanced Concession addresses these issues interest can drive airport growth presenting a win-win by defining new ways of approaching concession outcome for all parties. contracts in the airport sector based on similar and aligned interests, rather than different and adversarial objectives. Four guiding principles define a Balanced Concession:

1. Collaboration

2. Balanced Risks and Rewards

3. Transparency and Information Sharing

4. Mutual Interest 16 Balanced Concessions for the Airport Industry

Issues in Airport Concessions

Airport concessions suffer from a wide range of issues, which are identified through case studies and their impact assessed using a framework based on the lifecycle of an airport concession.

Many of these issues also exist in other sectors, and there are relevant lessons and best practices that can be drawn on to provide guidance to governments seeking improved outcomes from airport concessions.

The subsequent section defines solutions for a Balanced Concession to address these issues across the airport concession lifecycle, drawing on lessons learned from this analysis. 17 Balanced Concessions for the Airport Industry

Introducing the Airport The key features of the concession lifecycle are summarized below: Concession Lifecycle • Initial Planning and Concession Design Throughout this Booklet, issues and solutions which This frames the design of the concession define the Balanced Concession are assessed with and tendering process to secure the optimal reference to the airport concession lifecycle. concessionaire. “Getting it right” upfront is key, and many of the key features of a Balanced Concession Figure 6 (“Key Elements of Airport Concession Lifecycle”) that are explored in this Booklet can be secured at sets out how the airport concession lifecycle has been this point. A government business case, developed characterized into six primary activity areas spanning with the input of users, is an important tool to from initial planning and concession design, through to understand concession design options (for example, termination and transition of a concession contract. Many the allocation of risks between different parties) of these activities run in parallel to each other across the and evidence the value for money from the selected lifecycle of a concession. solution.

Figure 7 (“Issues in Airport Concessions Across Lifecycle”) • Airport Design, Development and Construction which follows sets out an illustrative summary of the This is most common for greenfield concessions, detailed activities across the lifecycle of a concession, although may be applicable to brownfield and issues frequently faced by concession stakeholders, concessions with significant capital investment which are assessed in detail in the following section. requirements. The activity commences with the selected concessionaire preparing the master The length and timing of activities in the lifecycle varies plan and detailed designs for the airport, which by specific circumstances, including whether an airport should be subject to consultation with government, is greenfield or brownfield, the maturity and nature of the customers and other stakeholders. Once the plans market, and the capacity and capability of government are finalized, project finance is drawn down and the to effectively deliver the requirements. Further, each concessionaire starts the construction, testing and activity in the lifecycle is not discrete or sequential; commissioning of the different components of the integrated planning and execution of activities is critical project according to an implementation schedule. The to maximize value. This is highlighted by the importance major responsibility related to the implementation of, for example, Operational Readiness and Testing tasks lies with the concessionaire but considerable (“ORAT”) planning through construction and development monitoring is required by government to ensure works to operations and management, or the interaction are contractually aligned. Further, customers need between pricing of airport services and ongoing capacity to be actively involved to integrate their plans for augmentation.Concession Lifecycle Key Elements commencement of airport operations.

Figure 6: Key Elements of Airport Concession Lifecycle

Airport Design, Initial Planning Airport Operations Termination Development and Concession Design and Management and Transition and Construction

Commencement Concession Contract Award of Operation End

Initial Planning Airport conceptual design, Illustrative and Concession concession design Timeline not to scale Design and tendering process

Airport Design, Airport detailed design, Development development and construction and Construction

Airport Operations Operations and management and Management

Pricing of Airport Pricing of airport services, (aeronautical and non-aeronautical) Services and review mechanisms

Ongoing Capacity Augmentation Requirements to increase capacity

Termination Termination and and transition Transition activities 18 Balanced Concessions for the Airport Industry

• Airport Design, Development and Construction periods. A critical consideration is treatment of This is most common for greenfield concessions, capital expenditure requirements where investment although may be applicable to brownfield may not be recovered by means of aeronautical concessions with significant capital investment and commercial revenue streams by the existing requirements. The activity commences with the concessionaire before the end of the concession selected concessionaire preparing the master term. This may occur with major investments across plan and detailed designs for the airport, which the term of a concession, but often becomes should be subject to consultation with government, particularly acute towards the end of the concession customers and other stakeholders. Once the plans life. are finalized, project finance is drawn down and the concessionaire starts the construction, testing and • Termination and Transition commissioning of the different components of the This concerns the end of the concession contract, project according to an implementation schedule. The whether at the end of the concession term, or in the major responsibility related to the implementation event of default. tasks lies with the concessionaire but considerable monitoring is required by government to ensure works are contractually aligned. Further, customers need Conclusions to be actively involved to integrate their plans for commencement of airport operations. The airport concession lifecycle provides a structure to assess issues within airport concessions, and • Airport Operations and Management alternative solutions which can improve outcomes for The ongoing operations, maintenance and all stakeholders under a Balanced Concession. These management of the airport is typically defined in the are assessed in the following sections of this Booklet. concession through the clear detailing of service level frameworks that should have been defined in the contract. This includes contract management and performance monitoring by government. It is Issues in Airport Concessions also important to ensure that the assets and facilities remain at the required standards, and that continuous As IATA has engaged with governments seeking to put in improvement and innovation takes place, particularly place concession contracts, as well as concessionaires, as the requirements of the industry may change over customers and consumer representatives, it is clear the duration of the concession. An Airport Service that there are a number of similar and common issues Level Agreement (“ASLA”) can provide a platform associated with airport concessions. At the heart of to measure performance on an ongoing basis and these lies a fundamental agency problem whereby continue engagement with users. concessions are typically determined and negotiated between government and private sector concessionaires, • Pricing of Airport Services with relatively limited focus on the customers, consumers Ongoing mechanisms to determine pricing of and communities that will be impacted by the concession airport services, including aeronautical and non- agreement. aeronautical price setting and review mechanisms. While aeronautical tariffs are usually determined This may lead to a misalignment of interests and based on national regulatory frameworks, it is an incentives manifesting, for example, in an over-focus overriding assumption of this Booklet that pricing on maximizing financial value to government or market for airport services should follow the International interest amongst prospective concessionaires at the Civil Aviation Organization (“ICAO’s”) key charging expense of other interests. As a result, through its work principles of non-discrimination, cost-relatedness, in multiple territories, IATA is frequently faced with transparency and consultation with users as well concessions which suffer from a similar set of issues as the implementation of effective economic across the airport concession lifecycle, such as inflexible oversight. In line with ICAO’s principles these should fixed charges, predetermined investment plans, high be incorporated into national legislation, regulation, levels of concession payments and limited involvement of policies 4 and concession terms. wider stakeholders in airport planning, development and operation. • Ongoing Capacity Augmentation This includes ongoing requirements to increase To understand the guidance required to create a better capacity, including capital expenditure and works, alternative that works in the mutual interest of all to cater to increased traffic volumes without stakeholders, it is critical to understand the key issues compromising on the level of service to customers and “pain points” faced by airport stakeholders across the and consumers. The master plan of the airport concession lifecycle. These are set out with supporting is typically included as part of the concession case studies and analysis below, based on the lifecycle set agreement, specifying the land use and other out in Figure 8. restrictions on augmentation of the airport throughout the concession life, with regular review

4 ICAO’s Policies on Charges for Airports and Air Navigation Services, Ninth Edition, 2012 19 Balanced Concessions for the Airport Industry and plans schedules

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Initial Planning and Concession Design Granting the right of first refusal reduced the government’s flexibility and ability to address capacity It is typically in the initial planning, concession structuring constraints. This, and the long-term nature of the and tendering process that the most value is at risk. The concession, create monopolistic conditions for airport commercial arrangements defined during concession infrastructure in Sydney, which in the past limited the design will impact the successful delivery of construction bargaining power of government and customers to and development, and operation of the airport over many address these issues. decades. Source: The Sale of Sydney (Kingsford Smith) Airport, However, there are several issues in concession ANOA; A Study of Wilton and RAAF Base Richmond for design that enhance the risks associated with airport Civil Aviation Operations, Department of Infrastructure concessions. and Transport.

Long and arbitrary concession length By contrast, if the concession period is too short and At times, the concession length prescribed for the without handback provisions, this will result in higher project is unduly long or arbitrarily selected, which may levels of charges during operations to recoup any initial impact different stakeholders in varying ways. Whilst capital investment and associated financing costs, and customers and consumers interests are to have an meet the concessionaire’s required equity returns. Further, efficient asset with appropriate service quality, the shorter concessions may result in bankability concerns concessionaire’s primary interest is to maximize return for the lenders, as the cash flows generated in a short and secure long-term projects. Government may have duration may not be sufficient to sustain high repayment competing objectives; it both wants the same outcome as obligations and may be subject to higher risk if faced with customers and consumers, and a well-functioning aviation construction delays or slower establishment of steady- ecosystem, but at the same time longer-term and more state operations than expected. lucrative provisions for concessionaires may increase the levels of concession payments to government. There are a range of mechanisms used in airport concessions to address some of these issues, including A longer concession period, especially accompanied options to extend the concession period on mutual with rigid conditions, is typically more beneficial to the agreement or the concessionaire’s discretion. However, concessionaire as it can collect revenue over a longer these have typically been quite simplistic in nature (for period and it may result in increased profits. This may example, a 25-year initial term with a 5-year extension adversely impact customers and consumers with delays option) without clear rationale supporting the selected to investments and a lack of flexibility in service levels concession length and extension option. over a longer period being common concerns. Further, in longer-term concessions, as airport capacity is reached, Limited stakeholder engagement in development of specific protections are required to ensure operational concessions or capital investment to prevent deterioration in service levels. Airport concessions often suffer from limited engagement with stakeholders, including customers, consumers and communities, in the initial planning and concession design Case Study: Sydney Airport Long-Lease processes.

The sale of Sydney’s Kingsford Smith Airport was Given that airlines and passengers are an integral part of completed in 2002 with Southern Cross Airports the airport ecosystem, the lack of involvement creates Corporation acquiring the shares in Sydney Airports risks and issues, such as fixed and outdated SLAs, Corporation Limited, the company that held the long- implementation of outdated airport technology, and term lease (50-year term, with an option for extension poorly planned infrastructure (which itself undermines the of 49-years). The sale agreement also granted the provision of cost-effective airport infrastructure). purchaser a 30-year right of first refusal over the development and operation of any second major airport within 100 kilometers. 21 Balanced Concessions for the Airport Industry

Case Study: Santiago International Airport (“SCL”) Focus on output-based KPIs rather than outcome- based performance measures The concession agreement for SCL, Chile, mandated the creation of a new passenger terminal. The Ministry Airport concessions have typically been biased towards of Public Works («MOP») undertook planning of the new output-based KPIs, with service levels determined by terminal in 2012, using an operational concept design outputs such as response times. from 2008 and the terminal is likely to be inaugurated in 2020. As a result the conceptual design will be more Whilst these are important measures and will likely remain than a decade old, and expected to be lacking in modern a key part of the performance measurement regime enhancements to terminal operations and technology. for airport concessionaires, customers and particularly consumers are typically more interested in tangible The long planning and development cycle for an airport performance outcomes as the outputs that produce them. concession, combined with rigid contractual provisions, creates a risk of outdated design and technology. The focus on output KPIs may not meet the requirements of customers and consumers, particularly as expectations Moreover, design requirements for SCL were finalized change over time. This may result in inefficient operations, without proper consultation with customers, enhancing for example paying for a service or service level not the risk of the solution not meeting the modern required, or poor levels of satisfaction for consumers. challenges of airport operations.

Source: IATA Analysis Deep-Dive: Output and Outcome Performance Measures in Airport Concessions

Limited involvement of stakeholders in the early stages of Many airport concession contracts include output- airport concessions can also undermine the success of rather than outcome-based measures, which new airport projects. undermine the need to ensure airport operators meet the requirements of customers and consumers at Limited consultation with customers in setting service the best value; the resulting inefficiency negatively quality levels and performance requirements impacts all stakeholders, and addressing this through outcome-based performance measures can create Similarly, since customers and consumers are the users better outcomes for all. of airport infrastructure, setting airport service levels and performance requirements that meet their needs is Examples of output-based measures include pre- fundamental to deliver operational efficiencies, optimize defined fixed investment requirements. These may passenger experience and support competition between take the form, for example, of specifying specific airlines. Further, with evolving industry dynamics and numbers of passenger boarding bridges, pre-defining a fast-pace of change associated with technology the timing of future runway expansion by a specific disruption and more demanding and discerning year in the concession, or determining the required consumers, service levels at an airport will continue to area or size of a terminal building. evolve over time. As circumstances change and the industry evolves, A key challenge emerges when customers and such output specifications may result in unnecessary consumers, as the primary user of airports, are not investments or out-dated service levels. This involved in jointly setting service levels and key undermines the performance of an airport. performance criteria resulting in ineffective KPIs and infrastructure development being mandated to the IATA prefers outcome-based mechanisms that do not concessionaire. This can be compounded when service pre-define outputs which cannot be predicted or may quality levels are rigid and not able to be amended during not be necessary in the future. Examples of outcome- the concession period through a consultative mechanism. based measures include, for example, ensuring that the airport has sufficient capacity to process a defined percentage of passengers through boarding bridges, or defining triggers for considering capital investment based on airport passenger numbers compared to the annual design capacity. 22 Balanced Concessions for the Airport Industry

To enable this, IATA advocates for meaningful and Source: GVK wins bid to develop Navi Mumbai airport; effective consultation with customers throughout the CIDCO to soon issue LoI, Deccan Chronicle concession lifecycle, and from an early stage in the bidding process to capture customer and consumer requirements, starting with bidding criteria, such as Conversely to this issue, the growing passenger, operational, and traffic demand needs at professionalization and globalization of the airport the requirements definition stage. This should be a key industry has led to a select number of companies input to the evaluation criteria for the concessionaire. competing in international concession tendering processes. Whilst the improved professionalization Source: IATA Analysis of the industry is to be welcomed, in the coming years consideration is required to ensuring the industry remains competitive globally and there is Limited participation in concession bid process not an excessive concentration of market power. This is complicated by the absence of supranational Whilst governments typically seek to stimulate market competition regulation for the sector. interest, there are a number of concession transaction processes globally which have resulted in low interest Excessive focus on highest concession fee in bid from best-in-class international operators, and mainly evaluation local market participants. Reasons for this include restrictions on investments by international entities, A key bid evaluation parameter typically used by regulatory and market uncertainties. However, the governments across regions is the highest concession impact is that concessions awarded to local operators fee. As a mechanism, this helps government to evidence may not lead to the desired adoption of global best the maximum financial return from a concession practices and result in sub-optimal operational contract award. practices. However, this does not consider the more balanced requirements of customers and consumers, such as Case Study: Navi Mumbai International Airport service levels, quality or adoption of new technology. Further, this financial metric does not consider the The construction of Navi Mumbai International Airport broader macro-economic objectives of government, in Metropolitan Mumbai was first conceived in 1997. including domestic economic impact through trade In 2014, after years of deliberations, the City and connections and export-led trading, tourism and Industrial Development Corporation (“CIDCO”), a maximizing domestic value creation (which in turn may government authority formed and controlled by the generate increased future tax receipts for government). Government of Maharashtra, issued the RFP for the greenfield airport concession. Case Study: Mopa International Airport, India, The airport, alongside Chhatrapati Shivaji International and Queen Alia Airport, Jordan Airport (“CSIA”), will form India’s first urban multi- airport system. The 160 billion Indian Rupee project Concession fees are frequently structured to maximize generated considerable initial interest among financial returns to government. The concession for international airport operators. However, at the the greenfield Mopa International Airport in India was conclusion of the bid process, only two domestic awarded to GMR Group, which bid a revenue share to airport operators submitted bids, GVK Power & government of 36.99%. Infrastructure Ltd & GMR Infrastructure Limited. In 2007, the 25-year concession for the Queen There were a range of contributing factors for this. They Alia Airport in Jordan was awarded to the Airport included a number of issues impacting participation of International Group in part because the consortium international parties, such as the complexity of project offered a 54.5% concession fee of revenues over the requirements and availability of local credible partners. life of the concession. The concession is generally Further, the synergies that GVK Power & Infrastructure regarded as a success with the opening of a new Limited could have gained from their existing CSIA terminal, upgrades to improvement in existing airport concession which included a “Right of First Refusal” facilities, were upgraded, and an expanded capacity provision, could have also been a relevant factor. its ability to handle the growing demand. However, the 23 Balanced Concessions for the Airport Industry

relatively-high level of concession fee results in higher a concession. However, in airport concessions there levels of charges to customers and consumers. are often inadequate provisions for a long-term airport master plan that reflects these needs, or a phasing plan Source: Public-Private Partnership Stories, IFC; GMR to determine how capacity will be efficiently developed wins bid to develop airport at Mopa, Times of India as demand grows incrementally. Instead, concessionaires typically view the airport asset only from the perspective of their concession term and as a result only master plan Focus on the concession fee as the bid evaluation infrastructure to the expiry of the term. This has created parameter may disadvantage customers and issues with short-sighted airport master-planning, can consumers, and may provide enhanced incentives for undermine the future capacity or development potential concessionaires to meet profitability requirements of the airport, and lead to gaps in the long-term strategic through increasing charges, minimizing investments planning required to optimize and expand national and/or operational and maintenance expenditure. aviation industries. Further, upon concession completion, Further, this may not be in governments’ long-term this can also lead to a potential requirement of asset interests. In particular, a lower concession fee may be demolition and recreation by a new concessionaire or the partially or fully offset over time through additional government. government tax and other receipts associated with the direct and indirect economic value add of an airport. Case Study: Quito International Airport

Airport Design, In February 2013, the new Quito International Airport Development and Construction was completed at a cost of USD $750 million and it replaced the incumbent airport. Within 10 months The decisions taken during Airport Design, Development of its initial operationalization date, in October 2013, and Construction lay the foundation for the effective the airport underwent its Phase 2A expansion which operation of the airport. If appropriate capital investment included the addition of a new area and passenger decisions are not made, the repercussions can be felt for bridges. In 2017, the airport initiated a new phase of decades. Cost efficient and timely development of airport expansion and improvement work which comprised assets to meet demand and customer requirements, with of four expansion and five improvement projects at the minimization of negative externalities on stakeholders, a cost of $60 million and $30 million respectively. is key. The improvement works primarily comprised of re-modelling and re-configuring of the existing Limited mechanisms for collaboration to optimize infrastructure which points towards an inadequate capital plans and detailed design provision for the ultimate capacity of the airport in the original master plans. Airport concessions typically provide limited or no ability for customers to formally engage with the concessionaire Source: IATA Analysis, Corporación Quiport and share inputs on the infrastructure development plan Announces Its Expansion And Improvement Plan For or participate in optimization of capital plans during airport The Quito Airport - 2017-2020, Corporacion Quiport; designing to balance capacity and demand. Mariscal Sucre International Airport Expansion and Improvement Quito, Airport Technology Some governments have acknowledged the need for stakeholder engagement in preparation of development plans and have accordingly placed a requirement on Overly-rigid construction schedules and plans concessionaires to consult with customers at a regular frequency. However, this is far from an industry norm and In certain concessions, there have been issues associated is a fundamental issue. with fixed capital investment requirements, which are not aligned with clear master plan phases, linked to Inadequate provision for a long-term airport master demand, appropriately timed or flexible enough to change plan and phasing strategy according to market circumstances in the early stages of a concession. Master planning of an airport needs to be viewed from a long-term perspective to maximize the ultimate capacity of the airport rather than just over the term of 24 Balanced Concessions for the Airport Industry

Case Study: Rome Fiumicino International Airport cost was estimated to be INR 127.00 billion. As a result, customers and consumers ultimately paid for this In 2013, Aeroporti di Roma (“ADR”) and Ente Nazionale increase in costs through a pre-funding levy (termed per ‘Aviazione Civile (“ENAC”) the Italian Civil Aviation as “Airport Development Fee”) and other tariffs as Authority signed an amended concession agreement, determined by the economic regulator. also known as the Economics Regulation Agreement (“ERA”). The agreement was updated with the aim Source: Operation, Management and Development of implementing ADR’s 12 Billion Euro long-term Agreement Delhi, Ministry of Civil Aviation investment plan.

These investments were pre-determined in the ERA and, despite lower traffic growth than expected, Airport Operations and Management the ADR were required to proceed with planned Inefficiency or issues in operations can adversely impact investments as they were contractually obligated in the the airport ecosystem and, given the complex nature concession agreement. of airport and airline operations, it is imperative that all stakeholders work collaboratively. However, in many Source: IATA; ADR’s New Concession Agreement, ERA instances, concession agreements do not mandate to Come into Effect and 2012 Traffic Performance, or incentivize concessionaires to be transparent or to GEMINA adopt a collaborative decision-making framework for key operational decisions that impact customers and consumers. Such conditions place unnecessary obligations or restrictions on concessionaires to build an asset Limited collaborative decision-making irrespective of the demand. This has resulted in inefficient asset creation, infrastructure that is not cost-efficient, Concession agreements frequently do not fully define and ultimately higher tariffs and charges than required at forums or mechanisms to invite inputs from stakeholders airports. during the ongoing management of a concession. This negatively impacts both customers and consumers, Over-investments undermining cost-efficiency but also concessionaires because they may not have visibility on key issues or concerns that could impact their Certain regulatory regimes determine tariffs based on the decision-making and improve the operational and financial level of investments at the airport. This incentivizes airport performance of the airport. operators to undertake higher levels of capital investment than required (“gold-plating”) to maximize profit. It may Limited information sharing provisions also not incentivize efficiency in delivering capital projects. Often in airport concessions, there are provisions Both these factors may undermine the cost efficiency of mandated in a concession regarding the sharing airport infrastructure. Governments in many instances of information between only government and the have not been able to effectively regulate such concessionaire, without a mechanism or tripartite investment, resulting in higher tariffs and charges for agreement for sharing beneficial operational and strategic customers and consumers. information with other stakeholders.

This lack of transparency results in various issues Case Study: Indira Gandhi International Airport including inefficient operations and undermines the ability (“IGIA”) of airlines to work with airports to improve passenger experience. In 2006, GMR Infrastructure Limited won the contract to operate, manage and develop IGIA in New Delhi, India. This involved the construction of Case Study: Chhatrapati Shivaji International Airport the third terminal and a new runway as well as other rehabilitation and improvement projects. For CSIA, the concession agreement only mandates for information to be shared with government but there While the estimated project cost for building Terminal 3 are no requirements or mechanisms for sharing of key was Indian Rupees (“INR”) 89.75 billion, the final project 25 Balanced Concessions for the Airport Industry

information such as the annual maintenance program No refinancing gain mechanisms or KPI reporting with airlines. Frequently, concession contracts do not specify gain Source: Operation, Management and Development sharing mechanisms to customers and consumers for Agreement Mumbai, Ministry of Civil Aviation refinancing benefits.

Under certain economic regulatory frameworks, the cost This lack of transparency may result in various issues of capital is incorporated as part of determining airport such as inefficient operations and undermine the ability tariffs, there are many concessions where tariffs are fixed. of airlines to work with airports to improve passenger Accordingly, where the cost of capital decreases or a experience. concessionaire is able to realize a refinancing gain through refinancing its outstanding debt financing package, this is Limited positive incentivization for innovation not shared with customers and consumers.

Technology-driven disruption is altering the aviation This deviates from ICAO’s cost-relatedness principle, landscape at a rapid pace. The inclusion of emerging resulting in customers and consumers paying higher technology in airport operations can bring in large charges than implied by the prevailing rate of capital improvements in efficiency at the airport, improving finance. operational and financial performance, and in many instances offsetting or delaying the need for new capital investment to meet capacity expansion requirements. Case Study: Sofia International Airport

However, concession contracts often do not provide The proposed concession agreement for Sofia incentivization mechanisms to adopt innovative solutions, International Airport in Bulgaria allows the particularly where the adoption of new solutions requires concessionaire to refinance its debt, with any re- collaboration across stakeholders or where the benefits financing gains being shared equally between accrue unevenly to different stakeholders. The absence the government and the concessionaire. There is of such mechanisms means that concessionaires often no specific provision for gains to be shared with see limited returns from implementing innovative solutions customers and consumers. because they are unable to quantify and ultimately capture the benefit that would be generated, and demonstrate Source: Ministry of Transport, Information Technology appropriate return on investment. and Communications Website

Case Study: Santiago International Airport Overly rigid SLAs and performance specifications

At SCL in Chile, a new concession agreement was Given the rapidly changing dynamics of the aviation signed for a period of 20 years. The bid evaluation sector, there is an inherent need for KPIs or SLAs to be parameter was a share of gross revenues with flexible to maintain their effectiveness. Concessions government, the winning Concessionaire bid to share frequently suffer from limited flexibility and a lack of 77.56% of gross revenue. provisions to allow for the relevant stakeholders including government or asset owners, concessionaires and The concession requires one Common-Use Terminal customers to enter into negotiations to amend service Equipment (“CUTE”) computer to be provided at every levels based on the changing needs of the industry and gate. Whilst it has been advocated by airlines that customers. increasing this provision would greatly accelerate passenger processing and there is a clear business This may result in concessionaires providing outdated case to do this, there is no mechanism to share the and even unnecessary service quality, particularly where cost and benefit generated from the investment there has been limited consultation with customers prior removing any incentive for the operator to provide to development of the concession contract. Further, over additional equipment. the course of a long-term concession these inflexible KPI’s or SLA’s can result in inefficient operations and poor Source: IATA Analysis passenger experience. 26 Balanced Concessions for the Airport Industry

Case Study: Kempegowda International Airport, or pre-determined escalations in charges, out of step with Bangalore (“BLR”) ICAO’s guidance on cost-relatedness.

The concession agreement for BLR prescribes the Conversely, whilst an unjustified setting or escalation of performance specifications for the airport for the tariffs negatively impacts customers and consumers, complete duration of the concession and does not arbitrary tariffs that are not cost-related can also have an provide any flexibility to update the performance adverse impact on the profitability of concessionaires. specifications based on the contemporary industry requirements. Pre-determined levels of aeronautical charges are also unsuitable in long-term contracts due to a lack of Source: Concession Agreement for Development, flexibility. Over time, fixed charges have the potential to Construction, Operations and Maintenance Agreement deviate from the principles of cost-relatedness – a risk for Bangalore International Airport, http://civilaviation. factor which may adversely impact concessionaires or gov.in/sites/default/files/moca_000743.pdf customers and consumers.

Additionally, pre-determined charges without mechanisms Limited provision for Environmental, Social in place to capture benefits associated with efficiencies and Governance (“ESG”) factors realized by the concessionaire, with or without collaboration with other stakeholders, mean that there is The aviation industry impacts the communities it serves. no reduction in charges to reflect efficiency gains. It generates significant positive externalities and socio- economic outcomes, but it also needs to be recognized Excess profits on non-regulated aviation charges that there are negative externalities and risks to be managed and mitigated. The same is true for above-expected growth in non- aeronautical revenues, which could result in super-profits Whilst the profile of corporate social responsibility for concessionaires whilst aeronautical charge levels initiatives and international cooperation on ESG initiatives remain fixed. has grown in recent decades, airport concession agreements often provide only basic provisions for ESG Unregulated charges on ancillary aviation services such as factors. These factors impact all members of the airport ground handling and fuel throughput can lead to excessive ecosystem. Concession contracts need to better consider charges for essential services. the environmental and social factors of an airport, and the required engagement with customers and communities to In some instances, the absence of a defined regulatory mitigate these. framework for select ancillary services such as ground handling has led to excess profits on these services. A holistic focus on the impact of airports on communities can help safeguard the long-term success of the aviation Pre-funding of airport investments industry. Pre-funding of airport investments through user charges prior to the creation of the asset means customers and Pricing of Airport Services $ consumers bear the financial burden without access to the asset. There is no guarantee that the customers Pricing decisions are of primary concern to all or consumers that are paying higher charges now will stakeholders, as they impact financial returns and also utilize the infrastructure that is created in the future, affordability for airline customers and consumers, and creating issues of equity and fairness. adequate protections are required to prevent abuse of market power. However, frequently pricing decisions have Pre-funding of airport investments through charges not been taken in a consultative manner or based on should be the last resort for financing under a Balanced ICAO’s principles. Concession model and should not be promoted by government given the negative and unequal impact on Limited rationale for aeronautical charges customers and consumers. In a number of examples, there is limited supporting rationale for aeronautical charges, or there are excessive 27 Balanced Concessions for the Airport Industry

Case Study: New Quito International Airport Although airlines may appeal the ANA charges decision, given the restriction in the concession The Concession Agreement for Quito International contract the regulator cannot intervene if the setting Airport was granted to the concessionaire, of charges has followed the formula set out in the Corporación Quiport S.A., for 35 years for the concession contract. Airlines and airline associations operation, administration, maintenance and have filed appeals against the level of charges in 2013, improvement of the airport service for the city of 2015 and 2016; in all cases the appeal was rejected by Quito, from 2006 to 2041. The concession included the regulator on the basis the charges were consistent the ability to operate and maintain the old Quito Airport with the formula in the concession contract. and to develop, construct, operate and maintain the New Quito International Airport. Quiport using the However, the regulator has been able to exert some cash generated at the old Quito Airport to finance the influence over the level of charges; in 2016 it revised construction of the new airport. the methodology for calculating ANA’s WACC, although this did not result in a reduction in the level of Source: Quiport Website; Laudo de Avaliação - charges. Curaçao, Quito and San José Airports, UBS Source. Support Study to the Ex-post Evaluation of Directive 2009/12/EC on Airport Charges, European Constraints placed on effectiveness of regulation Commission

In some cases, concession contracts are awarded in advance of or in the absence of an effective economic Changes in the regulatory till regulatory function. There are many examples where the concession process A concession contract with pre-determined charges may has resulted in a change to the regulatory till in order to undermine the role of an economic regulator, particularly maximize attractiveness to concessionaires and financial where legal and constitutional provisions to implement returns to government, adversely impacting customers regulation are required after a concession contract has and consumers. Moving from a single till regulatory been awarded. This may undermine the effectiveness philosophy, where all revenues are taken into account of economic regulation, to the detriment of customers, when setting aeronautical charges, to a dual till philosophy, consumers and communities. The level of competition where only the aeronautical revenues are considered, can in the sector makes the economic regulatory framework affect the quantum of aeronautical charges and impact critical for ensuring that airport operators do not abuse airline customers and consumers. Consequently, in dual their market power. till, a significant increase in non-aeronautical revenues can potentially result in super-normal profit for the concessionaire. Case Study: Aeroportos de Portugal (“ANA”) Concession Case Study: Nice International Airport In 2013, Vinci paid 3.08 billion Euros for the 50 year concession of 10 airports in Portugal. The level of In 2016, Azzurra, a consortium formed by Atlantia charges are pre-specified in the concession contract (65%), ADR (10%), and EDF Invest (25%) won the assuming a rolling price cap formula until 2022, with 28-year concession to Nice / Côte d’Azur Airport. provisions allowing for an extension until the end of Azzurra’s winning bid of 1.22 billion Euros was to buy the concession. Until 2016, charges were computed the 60% of shares held by the state in Aéroports de assuming a pre-tax WACC of 12%, which was higher la Côte d’Azur, the company which operates the Nice than comparable airports. For the period of 2016- International Airport and the airports at Cannes- 22, while the WACC considered was 8.3%, although Mandelieu and Saint-Tropez. Concurrent to and charges were not reduced. According to Airlines for following the bid process, a new dual till economic Europe (“A4E”), charges could have been reduced by regulatory philosophy was introduced for Nice 20% in 2017 or 8% per year until 2022. International Airport. This will result in a transition from a single till price cap based philosophy to a dual till over the course of 10 years. 28 Balanced Concessions for the Airport Industry

Source: Investor Briefing October 2016, Atlantia; Source: IATA Analysis; Chile’s Santiago Airport gets Privatization of Lyon and Nice airports to help public new Concessionaire, BN America finances, Le Monde; Case Study: France, ICAO

Overly-rigid capital investment plans and poorly defined capital investment triggers Ongoing Capacity Augmentation Many concession contracts do not include appropriate Airports are fixed infrastructure assets which have to cater flexibility in capital investment triggers, or have fixed to growing air traffic. While all infrastructure sectors have capital investment plans that are mandatory for the constraints on capacity growth, airport infrastructure is concessionaire. particularly complex given a range of factors – including the fixed location of airport infrastructure, need for This is not suitable for either the concessionaire or proximity to urban areas, and changes in technology. customers and consumers for a number of reasons. As Further, capacity growth at an airport cannot be planned identified above, predetermined, fixed and overly rigid independently of the growth plans of airlines operating capital investment plans do not satisfy the demand for the from the airport or in the region (both national and right infrastructure at the right price and time. Further, in international). However, there are a number of critical many instances operational efficiency and technological issues that exist in the planning and delivery of new improvements can offset the need for new capital capacity in airport concessions. investment. Limited penalties for under-investment and incentives to delay investment Case Study: Sofia International Airport There are frequently limited mechanisms in concession At Sofia International Airport in Bulgaria, the proposed agreements to penalize under-investment in airport concession agreement requires the concessionaire infrastructure, creating an incentive for concessionaires to to commit to construct a new “low-cost” Terminal delay investments as long as possible. 1 (with a capacity of 3 million passengers a year), within the first 10 years of the concession. However, Underinvestment adversely impacts service quality and the concession does not justify the length of the efficiency of operations, traffic growth, and can impact development process for the terminal; if the expansion customers and consumers significantly, as well as reduce is an immediate need it should be undertaken when the value of the airport over time and prior to its hand- required, however if it is a future potential requirement back to government at the end of the concession term. this fixed capacity requirement may need to be higher or lower at the point of need. Case Study: Santiago International Airport Source: IATA Analysis; Ministry of Transport, Information Technology and Communications Website The concessionaire pre-2016 was contracted to perform an initial large investment; however, there were no provisions in the concession agreement to make Fixed and overly-rigid capital investment plans place further significant capacity investments during the unnecessary restrictions on concessionaire which contracted period. As such, the needed investments results in issues of over-investment or under-investment, were not made, and according to Chile’s public works undermining the efficiency of airport operations and ministry (“MOP”) the airport handled more than inappropriate charge or service levels. 15 million passengers in 2013, causing significant capacity constraints. Lack of consultation and governance process for capital expansion Chile’s MOP awarded a new 20-year concession in 2016 to Nuevo Pudahuel consortium, which includes a Concession agreements often do not appropriately required investment of c. USD 700 million in expanding capture the integral role that customers should play in the the terminal to increase the capacity to 30 million ongoing capacity augmentation in an airport. passengers. 29 Balanced Concessions for the Airport Industry

Airlines are the backbone of the airport, serving as the Termination and Transition principal user of the infrastructure. This gives them an inherent advantage when evaluating what capacity In airport concessions, the termination and transition augmentation decisions should be taken or prioritized. provisions at the end of the concession period are typically under-detailed in terms of the framework or By fostering an open dialogue and formally mandating mechanisms that will enable a smooth handover. a consultation with the customers of an airport, the concessionaire will benefit from the creation of an Limited dispute resolution processes asset that effectively meets the needs of the larger airport ecosystem. Further, in many instances improved It is often the case that dispute resolution processes operational efficiency can offset the need for new capital are not sufficiently detailed or multi-layered, leading to expenditure. disputes which rapidly escalate to legal issues rather than being addressed through improved relationship management. Case Study: Greece Regional Airports Limited provisions for smooth termination The concession agreement for 14 Greek regional and transition airports mandates only the Asset Owner and Concessionaire agree upon the master plans and the In the event of termination, concessions often provide for capacity expansion timelines and trigger events. There a compulsory buy-out by the government authority. Key is no role for the Customers to evaluate or provide considerations include the event of default, obligations their inputs on the appropriateness of the master plans and rights of each party, termination procedure and or the triggers defined. payments and compensation, and claim on assets.

Source: Source: Concession Agreement for Regional Contracts also need to specify the transition Airports, Official Gazette Greece arrangements when a new operator takes over. Issues arise when a smooth transition requirement is not appropriately addressed on contract termination or Limited incentive for late-life capital expenditure expiry, which can manifest in passing on risks of business (“CAPEX”) interruption to customers and consumers.

Towards the end of a concession contract, concessionaires often have limited incentive to continue Conclusions investing into the asset. Without specific mechanisms within the concession contract in place to ensure this Airport concessions frequently suffer from a wide incentive, concessionaires will not invest in long-lived range of issues across the concession lifecycle. capital assets that may provide capacity over many decades but they will only enjoy the use and returns over a These issues have negatively impacted customers, relatively short period at the end of the contract. A cause consumers and communities. However, in many cases of this issue is that the concessionaire will view the airport they have also negatively impacted government and asset as depreciating to zero value at the expiration of concessionaires. its contract, whereas the airport will have a considerable useful life beyond this. This means that, depending on This suggests that improved approaches to the charge of control, concessionaires will either be dis- developing and delivering airport concessions can incentivized to make investments or alternatively recover lead to improved outcomes for all stakeholders. their investment from customers through increased These opportunities are at the core of the Balanced charges over a shorter period than the useful life of the Concession. asset. 30 Balanced Concessions for the Airport Industry

Lessons Learned from other Sectors other sectors to inform the structuring of a Balanced Concession. As identified in Airport Ownership and Regulation, there is a long history of the involvement of private sector finance, However, it should also be recognized that infrastructure capability and expertise in the development, delivery and projects in different sectors are not homogenous; there operation of public infrastructure. However, as has been the are many unique factors in respect of scale, technology, case in the airport industry, PPP and concession models service requirements, and risk and return characteristics, have emerged as an increasingly common tool globally to name only a few dimensions. Many sectors face similar across a range of sectors in recent decades. These include characteristics of demand risk and capital intensity, but public utilities, railways, roads, ports, power, and in social few compare directly to airports in terms of the separation infrastructure, such as healthcare and education. of customers (i.e. airlines) from asset providers (i.e. airports), which gives rise to potential agency problems, as Similar to concessions in the airport industry, in a number well as being consumer-facing and in the public eye. of these sectors these models have played a pivotal role in developing new infrastructure, bringing efficiency in These and other factors make the airport sector relatively operations and adoption of new technologies. unique, including the high levels of safety and security requirements, and the diverse and rapidly changing The objectives for and outcomes from adopting these service requirements of customers and consumers. The models have varied by sector. For example, in the roads ongoing need for capacity augmentation is also very sector in India in the early-2000s government sought different to other sectors. Typically, power concessions to overcome delivery and capital funding constraints; do not incorporate the need for capacity augmentation this has been a contributing factor in increasing the (a new power plant would be built instead since location pace of roads construction from two kilometers (“km”) is not by necessity co-located with existing capacity). In per day in 2000 to 28 km per day in 2018 5. In the power road and highway concessions capacity augmentation sector, technological innovations brought by the private would be less complex as it would only involve vertical sector has helped to address issues of transmission expansion (for instance, expansion of a four-lane to and distribution losses, reducing charges to consumers. a six-lane highway). In the case of airport projects, Additionally, objectives of government authorities typically capacity augmentation is far more complex and needs evolve over time as requirements and markets mature, for to consider and address various issues such as new example transitioning from a focus on access to private operational technology, ever evolving safety and security capital for new infrastructure to efficiency in operations requirements, and customer and consumer expectations. for established infrastructure. Balanced Concession Solutions Drawing Lessons for the Airport Sector in other Sectors

Concessions across infrastructure sectors have faced Whilst no two PPP or concession requirements are the many similar issues to those experienced in airport same and there is no “one size fits all” solution, there are concessions, and have a similar lifecycle including areas of consistent issues and failures within contracts concession structuring and planning, designing of the across the concession life cycle. To address these facility, development and construction, operations and concerns, government authorities across regions have maintenance, transition and handover. Similar to the airport attempted to implement a range of innovative contracting sector, there may be competing requirements between solutions. stakeholders including government, concessionaires, customers, consumers and communities. Facilities Further, government authorities have increasingly planning in all sectors needs to consider user requirements recognized the benefits of incorporating customers, for effective facilities, whilst concessionaires and consumers and communities in the development of government (who may be the customers) are incentivized concession agreements, rather than simply focusing on to maximize their financial benefits. the relationship between government as the asset owner and the concessionaire. Understanding and appropriately Many of the issues identified in airport concessions are addressing the objectives of different stakeholders has responded to in other sectors in a number of different helped to ensure the successful delivery of infrastructure ways with innovations in concession contracts. There assets and services within concession models. is therefore significant value in learning lessons from

5 Road construction up from 2km/day to 28km/day since BJP govt took over, News Corp VC Circle 31 Balanced Concessions for the Airport Industry

Case Study: Bolivia Cochabamba’s Failed Water Deep Dive: Road Toll Variable Concession Length Concession Mechanism

In Bolivia in an early water concession in 2000, LPVR was an auction mechanism proposed by Engel, Cochabamba Concession awarded to Aguas del Tunari Fischer and Galetovic in 1998, which has been used (“AdT”) resulted in extensive civil protests after the as an effective mechanism to mitigate traffic risk from signing of the concession agreement that eventually uncertain demand in road PPP projects. led to the government cancelling the contract. A range of factors contributed to the failure of the agreement, Unlike a fixed-term auction, under the LPVR including a decision that required the operator to build mechanism a concession is awarded to the bidder an expensive dam, to be financed through increases in with the least present value of revenue from tolls that tariffs. A later study suggested that consumers were will be collected by the concessionaire. The length of only informed of key features after the signing of the the concession is linked to the present value of toll concession and stakeholder buy-in was not conducted revenues, and the contract ends once the specified prior to the concession award. present value of tolls is collected; if traffic volumes are higher than estimated the contract finishes earlier, or if Lessons such as this have suggested that a “bottom- it is lower it is extended. up” approach with extensive and transparent consultation is important at the outset of structuring a Additionally, if government want to buy back the concession. concession the payment can be easily defined by the residual value of LPVR. Source: Cochabamba Concession in Bolivia, Bulletin of Latin American Research Source: Least Present Value of Revenues, PPP Infrastructure.com

The section below details some best practices adopted by government authorities in delivering concessions in a Whilst such mechanisms have proven an effective range of sectors. These best practices and how they have risk mitigation for traffic risk in the roads sector, the generated benefits are assessed. There are a number complexity of airport operations and revenue streams of opportunities to learn from these best practices in mean they would be more complex to structure in the developing solutions for a Balanced Concession in the airport sector. However, they do provide insight into more airport sector. flexible mechanisms that can be used to appropriately share risk through concession length than is often the Determining the Length of a Concession case in airport concessions.

Determining the length of a concession is a common Concessionaire Selection Mechanisms challenge across sectors. Whilst a large number of factors determine the appropriate length, which are explored in Another innovation observed in other sectors is defining the section on “Determinants Of Concession Length” on the concessionaire selection criteria, with mechanisms page 46, general guidance from the World Bank’s PPP being used to award concession contracts addressing Legal Resource Center suggests that typically a PPP issues such as affordability to customers and consumers concession length of 25 to 30 years is long enough to rather than the highest concession fee. For example, in sufficiently fully amortize major initial investments 6. the power sector contracts are frequently awarded on the basis of reverse bidding, whereby the developers However, in many instances detailed analysis is used to bidding the lowest tariff they would charge is awarded the determine the optimal concession length. There are also contract. Other sectors have seen high levels of emphasis examples of mechanisms which have been used to adjust being placed on quality as compared to price or cost- the length of the concession during its life, as in the use of based factors, particularly for strategically significant the Lease Present Value of Revenues (“LPVR”) mechanism projects. for road toll concessions.

6 Concessions, Build-Operate-Transfer (BOT) and Design-Build-Operate (DBO) Projects, World Bank 32 Balanced Concessions for the Airport Industry

Case Study: Dhaka–Chittagong Expressway Project It is easy to see how more advanced contracting models in Bangladesh like these could be applied to the airport sector given the complexity and rapidly changing pace of operations and The Dhaka–Chittagong Expressway PPP Project in customer and consumer requirements. Bangladesh adopted the quality and cost-based selection (“QCBS”) method to award the concession Transparency and Information Sharing contract. The RFP selection criteria had a quality to cost ratio of 90%:10%. Higher weighting was given Transparency and information sharing between to quality or technical experience, as the project was government, concessionaire and, in some sectors, considered of strategic significance for the country, customers and consumers can be critical to successful connecting Chittagong port to Dhaka. The QCBS concessions. method of bidder selection provides a balanced mix of technical evaluation and price evaluation. Recognizing this importance, government authorities have adopted mechanisms within concessions in some Source: People’s Republic of Bangladesh: Dhaka sectors to allow seamless information sharing between – Chittagong Expressway PPP Design, Asian key stakeholders. Development Bank For example, in the power sector, depending on how the sector is structured by country, there may be a high Outcome-Based Performance Mechanisms degree of interdependency between stakeholders. These span the supply chain from generation through In some other sectors, including delivery of complex to transmission, distribution and retail supply. Across government services, there has been a move away from this value chain there are a range of commercial models defining contractual KPIs in terms of outputs towards frequently applied, including concessions in generation outcome-based performance measures. This can facilitate and transmission and distribution. a more appropriate transfer of risk from government to the private sector partner, as well as providing direct The interdependence of these companies means real time incentives to achieve the outcomes that matter rather sharing is required to manage services, for example in than outputs that may need to change over time as terms of the level of current injected in the circuit, voltage industry standards evolve. control, power demand and usage. Grid balancing requires rapid data-driven decisions to be made which are required by the minute or even second. Case Study: Department of Health, State of Western Australia In some markets, for example India, companies across the supply chain may enter into tripartite agreements that The Department of Health for the State of Western set out the scope and process of information flow and Australia has developed outcome-based management overall cooperation and coordination mechanisms in their KPIs for PPP projects, which include the methodology operations 7. for their calculation, measurement and recording. These focus on the desired health outcomes, including Refinancing Gain Shares a focus on effectiveness, continuity and sustainability of healthcare services, rather than only outputs (for Concessionaires often refinance their debts to reduce example, facility availability). their financing costs, particularly where capital markets have moved favorably since the financing of the Output KPIs contributing towards these outcomes concession meaning the benefits of refinancing outweigh are also measured, including waiting time, response the costs of doing so. time, in addition to outcome-based measures. The KPIs also focus on incentivizing cost and management efficiencies for the concessionaire. Case Study: UK PPP Project Guidance

Source: 2017/18 Outcome Based Management In the United Kingdom (“UK”) PPP projects have Key Performance Indicator Data Definition Manual, historically followed the UK Office of Government Government of Western Australia Commerce’s guidance note for sharing refinancing gains. This includes guidance for drafting of the PPP

7 Model Power Purchase Agreement, Uttarakhand Power Corporation Limited 33 Balanced Concessions for the Airport Industry

contract to include provisions and measurement Cost-relatedness has therefore been a principle adopted methodologies for calculating the expected refinancing broadly in the power sector in particular, similarly to gain and determining the proportion of the gain that ICAO’s guidance for the airport sector. should be allocated to each party. These include bands such that the government’s share of gains increases Capital Investment based on the scale of the refinancing gain. Similar to the airport sector, incentivization for ongoing Source: The Enec PPP Guide, EPEC PPP Guide capital investment particularly in the later years of concessions has been a consistent issue across sectors. A number of mechanisms have been used to try and In early PPP models typically concessionaires or PPP address these in concession contracts. partners would be the beneficiaries of such gains. However, as PPP models have matured, in certain sectors and countries government authorities have developed Case Study: Manila Water Concession Agreements mechanisms to ensure refinancing gains are shared between different stakeholders. In Manila, water concession agreements include incentivization for concessionaires to continue making Refinancing mechanisms that allow for benefits to be capital investments even towards the end of the passed to customers and consumers to ICAO’s principles concession period. of cost-relatedness, whereby the updated cost of debt finance is reflected in charges. An ‘Expiration Payment’ is included in the contract. This would be calculated as the net present value Cost-Relatedness of Charges of the remaining unamortized asset, at the end of concession period which the government would pay Pricing of services for customers and consumers has this to the concessionaire. been a concern in concessions across sectors. Similar to airport projects, government authorities have focused on These options provide certainty to the concessionaire tariff setting with a range of alternative mechanisms for around recovery of investments made towards price determination or price regulation. the end of the concession life, incentivizing the concessionaires to continue capital investments up to the end of the concession. Case Study: Latvia Power Concessions Source: The Manila Water Concession, The World Bank Power concessions in Latvia allow for the benefits arising out of such refinancing to be shared not only amongst the concessionaire and the government, but It is also recognized that flexibility in capital investment also with the consumers in the form of reduced tariffs. plans can generate benefits for all stakeholders, particularly recognizing the time between project concept Additionally, as is the case in economic regulation in design at bid stage and construction. In the roads many power markets globally, the tariff calculation sector in India, subject to approval from government, the methodology for the electricity transmission services concessionaire is able to flex the capital investment plan incorporates the weighted average cost of capital, to a maximum of 10% of the planned capital value 8. which includes the effect of cost of debt. Any reduction in the financing costs is reflected in the Provisions for Termination and Transition revised tariff rates allowing the benefits to be realized by the consumers and customers as well. As described earlier, transition of operations can have a significant impact on customers and consumers as well as Source: Tariff Calculation Methodology for Electricity asset owners and concessionaires. It is observable across Transmission System Services, Public Utilities a number of sectors that provisions relating to termination Commission Latvia and transition in concession contracts are not sufficiently robust. Detailed guidelines or protocols for handback are often not sufficiently covered as part of the concession agreement.

8 Concession Agreement - Navayuga Quazigund Expressway, National Highway Authority of India 34 Balanced Concessions for the Airport Industry

However, best practice in concession contracts includes a clear definition of the transition process to safeguard the end of the transition period, and ensure the operational complexities that arise do not negatively impact customers and consumers.

Case Study: Tanzania Geothermal Power Generation Concessions

In Tanzania’s concessions for geothermal energy generation, the concession agreement defines the process for transition in detail.

This includes defining the transferring of duties, permits, and rights to the asset upon termination. The agreement also clearly defines the details of settlement procedures including payment of all dues and liabilities, inaction, and other events occurring before the termination date.

Source: Tanzania, World Bank Group

Conclusions

Concessions in many sectors have suffered from similar issues and challenges to those seen in the airport sector. These have elicited a range of responses within concession contracts; many of these best practices should be included within a Balanced Concession.

However, recognizing the unique nature of the airport industry, further detailed solutions required to reflect on these lessons and provide guidance which is relevant and actionable. This is set out in the following guidance. 35 Balanced Concessions for the Airport Industry

Key Takeaways • Within airport concessions there are a range of models that can be used dependent on airport requirements and government strategic objectives. In structuring an airport concession, the scope and commercial arrangements are complex and have a material impact on all stakeholders, not only government and the concessionaire.

• This creates issues across the lifecycle of airport concessions which are often developed between government and prospective concessionaires, with limited inputs from other stakeholders.

• Key issues include inflexible and unjustified fixed charges, predetermined investment plans, high concession payments, and limited involvement of wider stakeholders in airport planning.

• Lessons drawn from other sectors provide insight on how some of these issues can be addressed and the benefits these can have, not only for customers, consumers and communities, but also for government and concessionaires. 36 Balanced Concessions for the Airport Industry

Solutions for a Balanced Concession

Governments are recommended to adopt a Balanced Concession approach focused on aligning stakeholder interests and delivering win-win outcomes for all. Solutions are identified to address key issues across the concession lifecycle and safeguard public value from airport concessions.

When selecting an airport concessionaire, a balanced scorecard approach is recommended which focuses on demonstrating value for money by optimizing the trade-off between bidders’ financial and technical offers rather than the best financial offer alone.

Specific guidance for key concession features is also provided, including how to determine the length of a concession and key concession design features such as regular stakeholder consultation and CAPEX triggers. 37 Balanced Concessions for the Airport Industry

Guidance to Deliver a Balanced Whilst there are important issues to be addressed across the concession lifecycle, the most critical junctures in the Concession delivery of an effective concession and where most value is at risk to all project participants is in the early stages The recommendations in IATA’s June 2018 Airport prior to and at the start of a concession, and in the late Ownership and Regulation guidance manual remain stages prior to termination and transition. This is expected highly-relevant for the Balanced Concession, and it is given the key commercial activity, as well as construction recommended to be read in parallel. However, this Booklet and development, takes place in these stages. Both the goes further, providing practical guidance and tools to commercial arrangements in the concession contract and help government answer the key questions in airport the capital development are long-lived and may impact concession structuring where there is significant public outcomes over several decades; sufficient expertise and value at risk. resource to “get it right” at the outset of a concession is a must-have. This is a common point of failure by There is no “one size fits all” solution, with concession governments who may under estimate the complexity requirements and local market conditions varying of the undertaking, rush the process, seek to do it with significantly. The optimal concession design needs to be insufficient professional advice or consultation with developed with key stakeholders, including detailed and customers, or a combination of the above. robust market soundings with potential private sector concessionaires, to maximize the value of the concession Given this, there are also a number of particularly critical to the national aviation ecosystem and broader economy. areas where case studies and experience show significant value is at risk, many of which span across the concession The following analysis draws on best practice case lifecycle and require specific technical guidance. Detailed studies in airport concessions, lessons learned from Balanced Concession guidance for the following critical other infrastructure sectors, and the identification of new areas are also explored in further detail in the following innovations and commercial mechanisms that could be sections: considered to align stakeholder interests and deliver “win- win” outcomes for all. • Selection of Airport Concessionaires

• Determinants of Concession Length Balanced Concession Solutions • Concession Payments and Charges Across Concession Lifecycle • Super-Profit Protection Across the concession lifecycle, there are a range of solutions which can be adopted that align to the guiding • Consultation Processes principles of the Balanced Concession and its focus on creating virtuous cycles and benefiting multiple • Capital Planning and Execution stakeholders. A brief summary of the solutions that comprise a Balanced Concession is included here and • Continual Improvement and Airport Service Quality summarized in Appendix 3 (“Issues and Solutions Across Concession Lifecycle”) on page 68, which maps identified issues and their impact to Balanced Concession solutions.

Figure 8 (“Summary of Balanced Concession Solutions Across Concession Lifecycle”) below provides a summary of these solutions, across an airport concession’s lifecycle. As identified previously, this diagram is illustrative only and a number of activities may happen in parallel. 38 Balanced Concessions for the Airport Industry Financial reporting and fixed asset Figure of Balanced 8: Summary Concession Solutions Across Concession Lifecycle register to ICAO principles Con c Initial Planning and Effective independent Pricing aligned economic regulator ession Design

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Ongoing Capacity l Augmentaton business case Pricing of Services Airport Transparent and real time Business Case Government and consultation processes process for airport expansion Formalized governance Benefits sharing mechanism trigger and business case data sharing Clearly defined demand Ongoing Capacity Refinancing and for refinancing gains Requirements Restructuring Turnaround, Planning for concession payments in requirements, initial design Clear rationale Customer engagement Requirements and forecasting Definition Incentivization mechanism for continual improvement Management and Asset / Facility Enhancement (if required) Expansion Airport Benefits sharing mechanism for efficiency gains Concession Structuring Design and Financing mechanism for concession length for late-life CAPEX independent verification Clear rationale Innovation and Capacity Required Improvement (near end of term) CAPEX efficiency Continuous Customer involvement and bidder evaluation Future in selection criteria Procurement Testing / Market performance monitoring and performance for change to airport service Airport-specific benchmarking Termination and SLA Contract Defined governance Optimisation Review and Transition level agreements in tender documentation Regulatory framework Concept Design Bidders’ Process (if required) Multi-stage dispute Dispute Resolution Customer role in ORAT Contract Management resolution Balanced scorecard approach and Performance Monitoring to bidder evaluation Selection and Negotiation Evaluation, Airport service level agreements defined Transition contractual with customers Termination Notice provisions Operational Readiness Contract enhancement incentives Award

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r c a Customer engagement l o t M gr ion / an am m in detailed design a e and development gem ent 39 Balanced Concessions for the Airport Industry

Initial Planning and Concession Design • Design characteristics and preparation for the transaction or procurement process, including role In the early stages of government’s strategic decision- of different stakeholders in procurement and at each making, customer engagement in national aviation stage of the process. This could include, for example, planning is recommended. This can help validate whether an expert panel comprising central and line ministries greenfield infrastructure is aligned to customer and and agencies, regulators, IATA and other airline consumer requirements. Customer engagement in organizations, consumers and cargo stakeholders, requirements setting, initial design and forecasting which could determine the most appropriate bid can help improve the robustness of any concession and, evaluation criteria and support bidder evaluation where new infrastructure is required, the development of fit-for-purpose infrastructure. In the concessionaire procurement process, it is recommended to include the regulatory framework A detailed government business case is a pre-requisite in tender documentation to provide clarity for all to determine the preferred ownership and operating parties. Customer involvement in selection criteria model. Airport Ownership and Regulation included and bidder evaluation, particularly in assessment of guidance for this as well as a “PSP Toolkit” with best the concept design put forward by bidders, is another practice reference documents to support its preparation, touch-point which can help ensure customers influence and guidance from multilateral agencies such as the the infrastructure they are the primary users of. A World Bank on best practices in concession structuring 9. balanced scorecard approach to bidder evaluation The business case is a tool which can be used to provide is also recommended to ensure an appropriate trade- evidence that justifies, quantifies and demonstrates value off between financial and technical quality factors in for money. Before progressing to a procurement process, concessionaire selection. the business case should robustly and transparently consider a number of key points that set the ground rules for the concession including, for example: Case Study: Taiwan Taoyuan International Airport (“TTIA”) Terminal 3 Bidder Evaluation • Evidence of stakeholder involvement in project optioneering and solution development, and The tender panel for the contract award for Terminal 3 throughout the project development and business design included a number of experts from customer case process and community stakeholders.

• Identification of preferred solution through robust and IATA participated to provide an independent, user evidence based appraisal process perspective. As an independent representative of customers and a center of excellence in the industry, • Planning conditions for the airport IATA is able to help in bidder evaluation to support the legitimacy of the process and to secure the best value • Economic regulatory framework and alignment to for money from the procurement process. ICAO principles and the ICAO Building Block model Source: IATA • Key commercial arrangements for the concession, for example a clear rationale for concession payments and clear rationale for concession length Airport Design, • Performance management regime and service quality, Development and Construction for example considering operational requirements, airfield requirements, and demand triggers, with Customer engagement in detailed design and a focus on outcome KPIs to align concessionaire development provides significant value to incentives to the requirements of customers and concessionaires as well as government in right-sizing consumers and refining the design to ensure cost-efficient infrastructure. Further, a formal benefits sharing • Bidder selection criteria and evaluation methodology mechanism for design efficiencies within the concession

9 The World Bank publish a “concession checklist” for the airport industry which covers key required inclusions, at https://ppp.worldbank.org/public-private-partnership/ppp-overview/practical-tools/checklists-and-risk-matrices/airport-concession-checklist 40 Balanced Concessions for the Airport Industry

contract could be used to incentivize all parties to to ICAO principles can help to ensure cost-relatedness, work collaboratively to optimize design. Defined ESG particularly as market required rates of return may change obligations for concessionaires can provide a required over time. The concession commercial arrangements level of protection for impacted communities. should also consider the scope of aeronautical and non- aeronautical revenue and where, for example, revenue generated from real estate development facilitated by the Airport Operations and Management airport may generate benefits for the airport ecosystem as a whole. Pre-determination of charges in concession In the transition to operations, ensuring the customer role agreements would not be compatible with ICAO’s key in Operational Readiness and Airport Transfer (“ORAT”) charging principles when in the absence of appropriate can help to safeguard a smooth transition and reduce review mechanisms. the risks of delays or failures. Contractual mechanisms to encourage transparent and real time data sharing An effective independent economic regulator is a can help improve operational efficiency, including key requirement for a Balanced Concession, permitting data requirements, process of data dissemination and governments to reconcile the potential conflicts of frequency. interest inherent in its role as asset owner and its wider responsibilities to customers, consumers and Airport service level agreements defined with 10 communities . Defining financial reporting and fixed customers provide mutual clarity and ensure the asset register requirements in the concession contract operation of the asset meets user requirements, whilst can support this by providing visibility of the fixed defined governance for changes to airport service level asset base for the airport and mitigate any risk of a lack agreements recognizes that these requirements change of clarity on the regulated asset base. Super-profit over time given the pace of change in the industry and protection mechanisms within concession contracts can that the needs of customers and consumers can often also be used to safeguard the interests of government, be met in different ways. Benefits sharing mechanism customers and consumers and mitigate the risk of abuse for efficiency gains and incentivization mechanisms of market power through excess profits by an incumbent for continual improvement provide incentives where concessionaire. collaboration is required to improve performance, and the definition of the cost-benefit analysis or business case process for such change initiatives is recommended Ongoing Capacity Augmentation within the concession contract. A clearly defined demand trigger and business Airport-specific performance monitoring and case process for airport expansion and formalized performance benchmarking can help to ensure best governance and consultation processes can help to practices are incorporated into airport management, but ensure planning of timely and cost-effective capital aligned to the specific requirements of an airport and local investments to provide required capacity, or identify market expectations and circumstances. Defined regular alternative performance improvement initiatives without engagement processes between concessionaire and the need for capital investment. This can provide benefits airlines to review performance and charges may facilitate for all stakeholders. CAPEX efficiency independent this. verification can provide assurance that capital investments are required and that they are delivered Further, a benefits sharing mechanism for refinancing efficiently and in line with market benchmarks. gains is recommended to ensure ICAO principles of cost- relatedness are adhered to on an ongoing basis. Incentivizing required capital investments towards the end of a concession contract is a common issue in concessions across sectors. Innovative financing Pricing of Airport Services $ mechanisms for late-life CAPEX can help to address this to the benefit of concessionaires, government, customers It is an overriding assumption of this Booklet that pricing and consumers, for example through preventing recovery for airport services should follow ICAO’s key charging of investment over the remaining term of the concession principles of non-discrimination, cost-relatedness, rather than the useful life of the capital investment. transparency and consultation with users. Pricing aligned

10 IATA’s position on Economic Regulation of Airports and Air Navigation Service Providers can be found at www.iata.org/policy/Documents/economic-regulation.pdf 41 Balanced Concessions for the Airport Industry

Termination and Transition concessionaire should be best placed to offer cost effectively with quality services that can respond flexibly Multi-stage dispute resolution processes embedded to changing airline customer needs. within concession contracts can address emerging issues between contracting parties and stakeholders before In a Balanced Concession, the goal is to involve all they result in costly or disruptive outcomes. Drawing on relevant industry stakeholders in the development financing mechanisms for late-life CAPEX, reversionary of the bidder selection criteria which supports the value enhancement incentives can ensure investment development of cost efficient airport infrastructure and requirements towards the end of the concession life are economically sustainable growth of the aviation industry. met, and transition contractual provisions can ensure a The pre-consultation phase allows for a first evaluation smooth handover of operations. of airport customer and consumer requirements, which can be translated into objectives. These objectives are then translated into technical and financial criteria and Critical Balanced Concession weighted.

Solutions As the end users of facilities, airline stakeholders are very well placed to support the assessment and selection of Selection of Airport Concessionaires concessionaires, and have the capability to do so through subject matter experts, in addition to operational staff. Airport Ownership and Regulation incorporated guidance Meaningful and effective stakeholder consultation from an on an effective procurement process, including practical early stage will benefit the bidding process and support advice to deliver a tendering process successfully, pre- infrastructure that develops cost efficient outcome users qualification of bidders, market engagement, and the support and need. design of the transaction process. 2. Define Selection Criteria and Process Further consideration is provided here on how this process should be initiated, the definition of the selection Concession tenders typically require a financial and criteria and specific evaluation approaches to select a technical submission, with both subject to qualitative as preferred concessionaire. The methodology to select an well as quantitative assessment. However, within the bid airport concessionaire is critical because of the long-term evaluation process, there are numerous methodologies nature of the agreement. Competitive tension exists in and approaches that are commonly used by government the tendering process which will not exist in the same way when selecting concessionaires, or demonstrating value during the concession life, driving an imperative to “get it for money in procurement more generally. These include: right” at the outset by selecting the right concessionaire, as well as ensuring the right contractual mechanisms and • Best Financial Offer protections are in place. • Best Financial Offer, Technically Acceptable 1. Pre-Consultation with Stakeholders • Balanced Scorecard As the users of the airport, government should include pre-consultation with users and representative Best Financial Offer organizations on the development of requirements, initial design and forecasting, concession design This methodology is a relatively simple selection process and structuring. This allows users to identify their whereby the contracting authority selects the best requirements for services and facilities as an input to financial offer without regard to technical evaluation, the bidding process, and for government to have a more assuming the bidder meets all the conditions for robust view of demand, operating model, key performance participation in the tender process. metrics and longer-term needs. This is most relevant for relatively simple procurements, Customer consultation on bidder evaluation criteria can for example homogenous or undifferentiated products also help safeguard the process to deliver the best value where quality is less significant. It is not recommended for tender, aligned to basic principles that the preferred the selection of an airport concessionaire. 42 Balanced Concessions for the Airport Industry

Best Financial Offer, Technically Acceptable criterion, financial capacity and O&M experience. MIHAN India qualified six firms (GMR, GVK, Ideal Road This methodology considers evaluation of bidders’ Builders, Tata Group, PNC Infrastructure and Essel technical or quality factors as well as the best financial Group), of which GVK and GMR responded to the RFP offer. As illustrated in Figure 9 (“Best Financial Offer, in March. The evaluation criteria for the second stage Technically Acceptable”) below, this typically operates in was solely based on price, with GMR submitting the two stages. highest revenue share bid.

Firstly, a number of bidders are evaluated and scored Source: CAPA, The Times of India, Maharashtra for technical quality by technical evaluators, based on Government pre-defined evaluation criteria. A broad range of technical evaluators given the complexity of the requirement is recommended to make the process as objective as This methodology is best when the contracting authority possible, with independent moderation panels helping to is seeking to procure non-sophisticated items or services secure a robust outcome. where quality, safety and/or innovation are not a priority and therefore do not play a critical role in the final Once a selected number of technically acceptable bids selection. When the requirement can be clearly defined are identified these bidders are short-listed for financial and the risk of unsuccessful contract performance is evaluation. The best financial offer, as pre-defined in the minimal, cost or price may be the key distinguishing factor procurement process, is selected. of a winning bid 11, but the grantor is protected against bidders that do not have the capability or capacity to deliver to specifications. Case Study: Selection of Concessionaire for Nagpur Airport, India Case Study: Kansas City International Airport MIHAN India Limited, a joint venture between Security Screening Provider Challenge (2011) Maharashtra Air Development Company (a Government of Maharashtra undertaking) and Airport The US’s Transport Security Administration (“TSA”) Authority, issued an RFP to privatize the Nagpur selected a security screening service provider using Airport in March 2018. In October 2018, GMR Airports the lowest-price, technically acceptable criteria. Limited was awarded the 30-year O&M concession, which included the construction of a new terminal. The This was challenged in court through a post-award bid Figuretender x. process Best Financial was two stage, Offe withr, T aechnic RFQ issuedally inAcceptable protest. The court found that TSA did not sufficiently 2017 to select bidders primarily based on a technical demonstrate best value, and that “… when selecting

Figure 9: Best Financial Offer, Technically Acceptable

100 Best Financial Offer

Down-Selected

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11 Federal Acquisition Regulation — Part 15, 2000 43 Balanced Concessions for the Airport Industry

a low-price technically inferior proposal in a best is a linear trade-off between financial and technical value procurement where non-price factors are factors. more important than price, it is not sufficient for the government to simply state that a proposal’s Source: Justification for the Works Concession for technical superiority is not worth the payment of a Civil Airport for Public Use Sofia price premium. Instead, the government must explain specifically why it does not warrant a premium.” This allows for a more nuanced assessment of technical and quality factors and the willingness to pay for a given Whilst in relation to procurement of airport services level of quality, which is required given the sophisticated rather than a concessionaire, this demonstrates the nature of airport concessions and interaction between complexity of airport operations and the challenge concessionaires and other stakeholders. of applying a lowest price or best financial offer, technically acceptable evaluation criteria when non- This methodology is closely aligned to the Most financial factors are critical. Economically Advantageous Tender (“MEAT”) methodology introduced in EU legislation in 2014, which Source: Bid Protest, Court of Federal Claims, Hindson balances price and quality, technical merit, and functional & Melton; COFC Outlines Source Selection Missteps, characteristics. Under this framework value for money is GovLoop defined as the balance between price and quality, and it allows the contracting authority to reflect qualitative and technical aspects in addition to price when awarding a Whilst this methodology is common, the level of contract. This has already been applied within the airport sophistication in airport operations and the long-term industry in Europe, with many airports required to follow impact on stakeholders to a Balanced Concession mean EU procurement requirements. that this methodology may not always be preferred.

Balanced Scorecard Case Study: Heathrow Airport

An alternative approach advocated for under the Balanced Heathrow’s tendering process and award criteria Concession is the selection of concessionaires based are based on the most economically advantageous on a balanced scorecard approach. This demonstrates approach with competition being the primary vehicle value for money to government and other stakeholders to demonstrate the delivery of value. Assessment of through evaluating the trade-off between technical and suppliers includes consideration of health and safety, quality factors and bidders’ financial offers. Unlike other methodology, resources, behaviors, innovation, risk methodologies, this explicitly recognizes that the trade-off and value management and sustainability. in paying for a proportionately higher level of quality and demonstrates best value by optimizing this trade-off. Source: Prospective Suppliers, Heathrow

Case Study: Bulgaria Sofia Concession Award Figure 10 (“Most Economically Advantageous Tender Criteria (2018) Trade-Off”) below shows how this trade-off can work in practice. Based on technical and financial evaluation of The award criteria for the Sofia Airport concession bidder submissions these can be assessed either on a include a 55% weighting to financial evaluation and linear basis or by defining trade-off between technical and 45% to technical evaluation. This includes weighted financial factors. Definition of a trade-off may be useful to evaluation of technical proposals covering: conceptual ensure a different weighting is given to financial factors at development plan; business plan; financing plan; different levels of technical quality; for example, at a high overall strategy, and forecast tariff, EBITDA and capital level of quality financial factors may differentiate bidders expenditure plans. more to prevent paying for “gold plated” solutions.

This is a much more balanced evaluation methodology Selecting an Evaluation Model for airport concessionaires than is often the case. However, it is noted that the bidder award is based The evaluation model and specific mechanics should be on the highest blended score, and therefore there defined in the government business case to justify the 44 Balanced Concessions for the Airport Industry

preferred approach. Stakeholders should be involved in criteria. Following a review of the tender process by the this decision given the significance of choice of selection ANOA, it recommended that future trade sales have a methodology for customers and consumers. more transparent and accountable decision-making tender process, and to set out the relative importance For a project as significant as an airport concession, for each evaluation criterion. particularly when there is significant capital expenditure involved and/or the airport has socio-economic The sale of Sydney Airport followed in 2002, and the significance for the geographical area it serves, the Binding Bid Evaluation Committee determined that it balanced scorecard is the preferred approach and was not appropriate to apply a pre-specified weighting technical evaluation should consider a range of factors. systems to rank bid. It however included a statement This allows criteria to be selected and weighted to provide weighting the criteria as follows: “The Commonwealth the best overall outcome for all stakeholders. aims to maximize net sale proceeds on a risk adjusted basis while achieving optimal outcomes in relation to However, as more nuanced and qualitative factors the other criteria.” are considered in tender evaluation, particularly in technical evaluation, there may be concerns in respect of Source: Sale of Brisbane, Melbourne and Perth, ANAO; transparency and non-discrimination in evaluation. Best Sale of Sydney Airport, ANAO practice in tendering process and protections should be in place to safeguard against such issues, and transparency on evaluation criteria should be provided. 3. Evaluation, Selection and Negotiation

Evaluation is typically conducted based on a mix of pass/ Case Study: Sale of Brisbane, Melbourne, Perth fail responses (for example, acceptance of contractual and Sydney Airports terms, evidence of financial commitment, confirmation of a binding proposal), and other technical criteria which Australia’s Airport Privatization Program saw Brisbane, are categorized and given relative percentage weights in Melbourne and Perth airports effectively privatized the evaluation process, which should be transparent to and sold with long-leases of 50 years with a 49 year bidders. extension option in 1997. The Request for Proposal issued to bidders in October 1996 stated the sale IATA recommends government do not pre-determine the objectives, along with an evaluation criteria; however, design of the airport infrastructure and instead place the no particular weighting or priority was given to the onus on the bidders to present both their approach and

Figure . Most Economically Advantageous Tender Trade-Off Figure 10: Most Economically Advantageous Tender Trade-Off

Weighted Trade-Off Linear Trade-Off

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concept design to deliver the brief, enabling the adoption first assessment of planning, implementation and delivery of innovation and best practices. The solutions proposed capacity of bidders. Appendix 4 provides details on the should not be committal and should provide the selection types of information that should be provided at this level. panel with a technical basis that can then be assessed against bid evaluation criteria. The sections below provide Key elements of the assessment criteria should include details on specific considerations for technical and a detailed assessment of traffic forecasts, demand and qualitative criteria, and Appendix 4 (“Qualitative Bidding capacity solutions, a land use plan, master plan and Framework”) provides a list of elements that would be phasing strategy to deliver the required capacity solutions, required to assess bidders. and a concept design that is both flexible and efficient to develop. In addition to technical criteria, there are key contractual and financial parameters that are used in the selection process. These should not solely be the highest Example: Pre-Qualification Criteria concession fee. Alternative or additional criteria could be considered, but are not always compatible with the Each sector and project has its own specificities. For concept of a Balanced Concession. example prequalification criteria for an airport PPP may include: While it is normal that the winning bidder will make their return based in part on airport charges, the structure of • level of owned total assets in excess of a set the financial criteria should not incentivize bidders to over- amount bid and then recoup their investment purely by raising charges. As a general rule, governments should target that • recent experience managing the construction the privatization processes will not result in the level of and operation of an airport of similar size and airport charges adversely increasing due to, for example, complexity in a similar market the inclusion of financing charges from over-leveraging the project. See also the section on Concession Fees and • recent experience raising similar amounts of debt Charges below. and equity

Non-price financial factors may also form part of • exclusion of air carriers, or of companies owned the technical evaluation, for example, assessing the by air carriers, or of operators of airports located robustness of the bidders’ financial plan, financial risk close to the site (e.g. within 800 km) (which would management plan, and financial strength of the project create a natural conflict of interest) company to deal with commercial risks and distress. Clearly these criteria will need to be adjusted based on Defining the Criteria Weighting market context.

These criteria and their weighting will vary by project Source: PPIAF/World Bank Group, Creating A requirements (for example, level of capital investment Framework for Public-Private Partnership (PPP) requirement) and markets. They should cover as a Programs: A Practical Guide for Decision-Makers, minimum the bidders’ qualifications and experience, Jeffrey Delmon key personnel, technical plans, health and safety, environmental and social plans, and management capability and capacity. The use and weighting of each Evaluation, Selection and Negotiation criterion needs to be considered in light of the incentives they will provide to bidders and the alignment of these Expert panels should be involved in the evaluation of incentives to project objectives and stakeholder interests. bidder technical and financial proposals, particularly given the qualitative nature of scoring technical submissions. Pre-Qualification IATA recommends that customers are involved in this process, as well as wider government and non- Information should be provided in a detailed brief as government stakeholders, where appropriate, to deliver part of a pre-qualification process which allows bidding balanced outcomes. Moderation panels should be used to parties to describe their qualifications and experience in validate evaluation and ensure fair outcomes and non- delivering what is required at the airport. This allows for a discrimination. 46 Balanced Concessions for the Airport Industry

Conclusions Government may prefer a longer concession period where it stands to gain from increased concession fees It is recommended not to evaluate concession tenders or upfront capital receipts from the concessionaire (or, on the basis of financial proposals only. A balanced dependent on project-specific factors, reduces any scorecard approach is preferred, which allows for a payments to the concessionaire). However, this should more precise trade-off between financial and technical be understood as a product of the present or future value factors. of the contract to the concessionaire, and government should be conscious that the earlier reversion of the However, any evaluation model needs to consider airport asset may have a financial value to government, as appropriate mechanisms, including transparency, to well as enhancing its control over the airport sector and safeguard non-discrimination in the tender process, its wider socio-economic benefits. Where government evaluation and award. takes a balanced approach, i.e. considers the trade-off between financial and other strategic objectives, shorter Expert panels should be involved in evaluation, with concession terms may be preferred. Further, the following benefits to inclusion of customers and other key analysis demonstrates that concession payments, which stakeholders to the concessionaire selection. are a key interdependent factor with concession length, should be justifiable.

Determining the optimal concession length can represent Determinants of Concession Length a fine balancing act between stakeholders and the range of strategic objectives that government have for a project, Balanced Concession Preferences and there is no clear or universal preference. It is strongly recommended; however, that the concession length The basic determinant of an appropriate concession be determined and justified through the government length is the required period for a concessionaire to business case with reference to detailed quantitative recover its capital investment with a market return for financial and economic analysis that recognizes the trade- the level of risk taken. However, it has been observed off between different strategic objectives, and places that airport concessions can suffer from unduly long and public value at its heart. arbitrary concession lengths. Part of this is due to the complexity and many interdependent factors involved Indicative Decision Tree for Concession Length in assessing this basic determinant, their variability over time, and the trade-offs that government need to consider Figure 11 (“Indicative Decision Tree for Concession to establish the best value for money solution. Length”) below provides a representation of some of the factors that need to be considered when optimizing a Generally a longer concession period is in the interests concession length. of the concessionaire, all other factors being equal. Customers have historically tended to prefer a shorter These simplified factors include the extent of the capital concession period due to concerns about the potentially investment requirement, type and objective of the non-competitive tendencies of the airport sector and concession contract, financial viability of the project itself, a desire to maintain a level of competitive tension in and prevailing capital market conditions. Of course, there the industry through more frequent re-tendering of are many additional factors to consider in the detailed concessions. However, customers may also favor a longer evaluation of concession length, and this analysis is period on the basis that charges will be higher if the indicative; the determination of concession length should financing of the airport capital investment is over a shorter be based on detailed analysis considering project and concession period rather than the (most likely) longer market specific factors. useful life of the assets, assuming the concessionaire needs to recover capital investment over the concession In this analysis a brownfield, operational airport requiring term in the absence of terminal value mechanisms. management support only would typically require a Excessively short concession periods may also be short-term management contract only. This would not be unattractive to the market, may not be bankable if project classed as a concession model in this analysis, given the cash flows are not sufficient to meet debt repayment absence of the contractors’ rights to project cash flows, obligations, and there can be significant cost to procure but is shown for clarity. and transition between contracts. 47 Balanced Concessions for the Airport Industry

Where an objective of the contract is to manage capital significant minority equity stake of 49%, concession investment in addition to management requirements, terms were varied for different airports depending on an Operations and Maintenance (“O&M”) concession the capital investment requirement. could be applied with defined CAPEX responsibilities for the concessionaire; in certain circumstances with a For example, Natal Airport was granted in 2011 with high level of initial CAPEX requirement for a brownfield a 28-year concession term, and Brasilia Airport and airport (for example, an additional runway and significant Viraconos were granted in 2012 for 25-years and terminal expansion), a longer-term DBFOM concession 30-years respectively. could even be appropriate. The term of the concession will be dependent on the period required to meet Source: anac.gov.br concessionaires’ target equity Internal Rate of Return (“IRR”), defined within the government business case and incorporating market sounding. For illustrative purposes this decision tree is represented as a continuum with a greenfield airport requiring a significantly higher level of capital Case Study: Brazilian Airport Concessions investment and DBFOM concession, although there may be some overlap between greenfield and When the Brazilian Government commenced its brownfield concessions dependent on the extent of concession program in 2011/2012 through long- capital investment required. term concessions with the government retaining a

Figure . Indicative Decision Tree for Concession Lengh Figure 11: Indicative Decision Tree for Concession Length Model Indicative Decision Drivers Type Lenght 2

No CAPEX Requirement - Management Management Support 1 1 to 5 years Contract Needed Only

Brownfield O&M 5 years Relatively Low Concession

CAPEX Requirement

O&M Relatively Concession / High DBFOM 20 years Concession

Capital Market Conditions Yield Curve 4 Financing Strategy

Normal Curve High D/E Ratio 20 years Relatively High Cash Flow to CAPEX Forecast Ratio (CF/CAPEX) 3 DBFOM Concession Greenfield

Relatively Low Cash Flow to CAPEX Forecast Ratio (CF/CAPEX) 3 Inverted Curve Low D/E Ratio 40 years

. The management support model does not refer to a concession. . The indicative lengths should be validated through a financial feasibility assessment specific to the project. . Assumes no capital receipt or concession fees to government as a required input for the concession. . A ‘normal’ yield curve typically refers to an expansionary period where short term debt is relatively cheaper than long term debt. An ‘inverted’ yield curves typically refers to a recessionary period where the opposite is true. 48 Balanced Concessions for the Airport Industry

Case Study: Airports Council International (“ACI”) EU characteristics. A project with a relatively high level of Airport Review cash flows relative to required CAPEX is a more viable project than one with a low level of cash flows relative ACI’s 2016 study into ownership of European airports to CAPEX and, all things being equal, will be able to found, as would be expected, a relationship between meet its financing repayment requirements to both debt the length of concession agreement and capital and equity finance providers. As a result the required investment requirements, strongly related to the size investment will be considered lower risk. and growth potential of the airport. In addition, the timing of the capital investment in 56.1% of airport concessions within the EU were found respect of prevailing capital market conditions will to be within the 20-50 years length, with 33.7% less determine the availability and pricing of finance. than 20 years. All things being equal, an expansionary market (represented by a normal, upwards rising yield curve) Source: ACI, “The Ownership of Europe’s Airports”, suggests a more liquid capital market, with debt 2016 cheaper in the short than long-term, and higher debt- to-equity ratios for borrowers. These factors will reduce the Weighted Average Cost of Capital (“WACC”) for the For a greenfield airport, the financial feasibility of concessionaire, allowing it to meet its debt repayments the project based on project cash flows (revenues, and equity shareholder return requirements over capital expenditure and operational expenditure) a relatively shorter period. This results in a shorter is a key consideration. Each project will vary in its required concession period, even where all other basic feasibility, considering factors such as unique project factors are the same. An inverted yield curve in capital spend and expected revenues based on the a recessionary environment, whereby debt is cheaper in Figurespecific . market. Concessio The ratio of expectedn Pa ymecash flowsnt ato nd Chargesthe long than Tr short-term,ade Diagram and or where capital markets CAPEX is used here to illustrate these unique project are experiencing reduced levels of liquidity due to

Figure 12: Concession Payment and Charges Trade-Off Diagram

High

Project Bankability Line Conventional Concessionaire / Concessionaire Government Bargaining one Interest

Government / Maximum Charge Level Asset Owner Interest

Alternative Bargaining ones

Justified Concession Fee

Feasible Negotiation Zone Charges / Concessionaire Revenue Customer / Consumer Interest

Low Concession Fees / Capital Payment to Government High 49 Balanced Concessions for the Airport Industry

market uncertainty implies the opposite. This results in a Increasing concession payments to government are a longer required concession period, even where all other common motivation for increasing concession length. project factors are the same. Concession periods in However, it is argued here that concession payments excess of 40 years are typically only required in specific should not be a primary variable to determine market conditions and where CAPEX requirements are concession length. unusually high relative to expected cash flows. Governments should also consider the impact of Concession Payments deferring the ultimate benefit the airport will create for the government once it reverts to its ownership at the Importantly, this analysis focuses on project and market expiry of the concession. factors in the determination of concession length. Whilst concession payments in the form of concession fees or capital receipts are a common motivation for Concession Payments and Charges longer concession terms, any concession payment should be justifiable and supported by a value for money There are many services that are provided by government assessment to ensure it supports public value. This to the aviation community to enable the successful should therefore be a fixed figure in determining project operation of an airport. These may include preparation viability (similar, for example, to CAPEX requirements) of land to de-risk private sector investment, enabling and not a primary variable to determine concession infrastructure such as road and rail connections, the lease length. of the land itself to the concessionaire, and the provision of an effective regulatory function to facilitate the aviation Concession payments are assessed in more detail in the sector. following section. Further, there are a wide range of both positive Scope of Concession and negative externalities associated with airport development and operation. These include, for example, The scope of the concession in terms of revenue economic multipliers and boosts to trade and tourism generation opportunities is critical, as opportunities (which positively impact national treasuries and ministries such as real estate development can impact the of finance through tax receipts as well as society), but required rate of return to shareholders, allowing for also environmental and other negative impacts on local reductions in charges for aeronautical services. and other communities. Government proceeds from increased economic activity may serve to offset the loss Increases in concession fees can negatively impact the in government revenue from lower concession fees, and ability for shareholders to meet their target equity IRR. should be considered. This means that relatively higher concession fees can have a material impact on required concession length. Challenges in Airport Concessions At its extreme, this impact may even compare negatively for government as compared to deferring concession However, frequently under an airport concession fees to facilitate handover of the concession to governments are seeking to maximize returns, and either government earlier. seeks to monetize the value of a concession by setting a concession payment at the highest level the market can accept, or defining the concession fee as a bidder Conclusions selection criteria and seeking the highest offer.

Concession length should not be arbitrary and should Figure 12 (“Concession Payment and Charges Trade-Off be justified through the government business case Diagram”) below shows how frequently the setting of with detailed quantitative financial and economic charges may become, in effect, a negotiated settlement analysis and recognition of the trade-offs required between government and the concessionaire market. between different strategic objectives in determining concession length. Airport Ownership and Regulation All other things being equal, a government’s typical provided guidance on business case best practice, objective is to maximize concession payments, and a PSP toolkit with further reference documents. concessionaires seek to increase charges and revenue, and customers and consumers have the opposite interest, to minimize charges for a given level of service. 50 Balanced Concessions for the Airport Industry

This diagram is intended to conceptually illustrate some of the airport investment, and in the interests of the key points and trade-offs in the setting of concession concessionaire because it allows for a target return on payments and their impact on charges. As concession investment that makes the project financially feasible. payments rise, the charges that a concessionaire needs to support a financially-viable project increases. This is Structure of Concession Payments represented as the “Project Bankability Line”. There is also a notional charge level at which further increases The guidance here is agnostic to concession payments result in no additional revenue because customers and in the form of leases/rents, ongoing concession fees consumers will not be willing to pay. This is represented as or upfront capital receipts, as long as they are clearly the “Maximum Charge Level”. justified. However, based upon the principle that concession payments should be related to services, there If government have the sole objective of maximizing is a preference for ongoing concession fees as opposed concession payments, the incentive will be to move to up-front payments. Requiring that the payment is concession charges to the Maximum Charge Level ongoing in place of upfront can also reduce the potential in order to support the highest possible concession risk associated with the political business cycle and short payments. This outcome will have a direct negative impact term incentives for governments. However, it is recognized on the interests of customers and consumers and is likely that government may have particular fiscal or budgetary to result in adversely impacting typical economic benefits. constraints or objectives which dictate the preference Detrimental impacts may include reduced traffic due to for timing of cash flows. In all instances any financial higher cost of air travel and reduced economic activity engineering should be justifiable and with reference to the ultimately leading to a loss of government tax revenues. prevailing financing rate.

Balanced Concession Approach Where the structure of payments is variable (for example, expressed as a percentage of revenue) rather than fixed, The Balanced Concession argues for a different approach this may be a commercial choice for government. Clearly that creates “win-win” outcomes for all stakeholders. It is variable cash flows carry more financial risk, so a higher suggested that government should be providing services return would be expected than fixed payments. Again, this in exchange for concession payments; this is in adherence should be justified with reference to the level of risk taken to ICAO’s policies that airport charges should be related and prevailing capital market conditions. It should also to the cost of providing airport facilities and services, to be recognized that variable payments are a commercial protect against stakeholders benefiting from monopolistic outcome not directly linked to the value of services positions. Government may also consider economic and provided to the airport. other impacts in its business case to value the socio- economic impact of airport investment and ensure this is not undermined by excessive concession payments. Case Study: Kansai Airports

The scale of airport investments warrants that these wider In 2016, Kansai Airports (a consortium formed by socio-economic outcomes are considered in detail in the Vinci Airports and Orix) commenced operations under business case for an airport. Whether through reference a 44-year concession for Kansai (“KIX”) and Osaka to the financial cost of services provided, or the economic Itami (“ITM”) airports. In 2017, the consortium was positive and negative externalities associated with an also awarded a 42-year concession for Kobe airport. airport, concession payments can therefore be justified Concession payments for the concessions comprised through detailed financial and economic analysis within a range of mechanisms, as follows: the government’s business case for a concession. KIX and Itami Kobe

Upfront Fee N/A € 3.4m (¥ 450m) Once this approach is taken to define and agree a Fixed Annual € 280.6m justifiable concession payment level, in line with the € 3.4m (¥ 445m) Concession Fee (¥ 37.3bn) services and infrastructure provided, the appropriate level Lower of 3% Lower of 3% of charges can also be determined based on the Project of revenues in of revenues in Bankability Line, all other things being equal. excess of 1.13bn excess of € 15m Revenue / Profit (¥ 150bn) per (¥ 2bn) per annum Share Mechanism annum and 6% and 6% of cash This solution means an appropriate level of concession of cash flows flows available to payment for all stakeholders. It is in the interest of available to shareholders government because it appropriately values the impact shareholders 51 Balanced Concessions for the Airport Industry

Concerns were expressed by domestic and Case Study: Greece and Concession Accounting international investors about the level of concession fees. The government rationale for the fees was the In Greece, where a significant upfront payment was a cost borne by government of investment in reclaimed selection criteria for both Fraport Greece concessions, land at KIX. the airports use concession-based accounting as the basis for airport charges and as permitted in Kansai Airports (Vinci and Orix) was the only the contract. This results in existing assets being consortium to submit a compliant bid, and following depreciated over a longer period of time, an effect that negotiations they secured the concession for KIX is countered by potentially accelerated depreciation and Itami. The tender process for Kobe commenced of any new CAPEX made during the concession. in 2016, and while many companies participated in Any bid which is above the book value of the assets the tender, Kansai Airports received the first right of automatically translates into higher charges as the refusal as the government aimed to consolidate the concession fee is included as an allowable cost in the operation of the three airports located in the Kansai calculation of charges. area. Source: Fraport Greece Concession Agreement, IATA Source: Japan’s airport privatisation picks up pace, Analysis CAPA; Capital Market Day, Vinci; Japan Infra to Take Off, Clifford Chance

Conclusions Reducing or Removing Lease and Concession Payments Concession payments, in the form of rents/leases, Through a proper and robust financial and economic upfront capital receipts or ongoing payments, should analysis in the business case, government may find that be justified with reference to the value of services reducing or removing lease payments and concession provided by government and the socio-economic fees altogether may benefit all stakeholders and represent impact of airport investment rather than maximizing value for money. government returns.

Even where it results in losses in respect of services Under this principle, concession payments should not government provides to the airport, these may be be the determinant for selecting the winning bidder. recoverable through, for example, future tax receipts generated by increased economic activity. As suggested Evaluating these factors within the government here, a detailed assessment is required to support this business case allows for clear and transparent decision by government considering macro-economic evaluation of the appropriate level of concession fees, impact and value for money. Further guidance on this is and the trade-offs associated with different fee levels. included in Airport Ownership and Regulation, and the supporting PSP toolkit. Super-Profit Protection Considerations on Charges It is an overarching assumption throughout this Booklet It is assumed throughout this Booklet that the regulatory that the regulatory function will be fit-for-purpose to function will be fit-for-purpose to provide the necessary provide the necessary safeguards and robust forms of safeguards and robust forms of economic regulation, and economic regulation. However, there may be instances a Balanced Concession does not reduce this requirement. where specific contractual mechanisms can protect against abuse of market power by a concessionaire in addition The evolution of charges should be linked to the actual to the regulatory function. One of these is in relation efficient costs of operating an airport or regulatory policy to super-profit, or excess profit being achieved by the in regards to an appropriate rate of return. Entering into concessionaire as a result of monopoly position enjoyed a concession agreement should not, all things being by concessionaires during the life of the contract and or a equal, translate into an increase in charges. Governments suboptimal concession design at award. should consider this when reviewing economic regulation for compatibility with different bidding criteria and concession payment models. 52 Balanced Concessions for the Airport Industry

Figure 13 (“Example Profit Share Mechanism”) shows an government, customers and consumers against excess example of a contractual mechanism for incentivizing and profit. Further, it would help to foster a collaborative sharing profit, whilst protecting against excess profits environment in airport management whereby the beyond the market norm. Illustrative figures are used to concessionaire and stakeholders benefit from realizing demonstrate this and would typically need to be adjusted efficiencies and are incentivized to work together to to reflect local market conditions and required return on achieve them. equity. Of course, the success of a contractual mechanism of this This example works with several “profit bands” which nature is dependent on a number of factors. It requires determine the share of profit. Up to a lower threshold, in open book accounting and transparency regarding the this case 8% profit margin, the concessionaire is entitled financial performance of the concession, and expertise to retain 100% of profit. As this increases through pre- and experience in contract management to effectively defined bands, profit generated can be shared between oversee the mechanism, with appropriate governance the concessionaire and stakeholders (in the form of returns processes embedded within the contract. Further, since to government or reduced charges to customers and market conditions and profit bands change over time consumers). such a mechanism would need to be subject to market benchmarking, reviewed and amended over time, in line In this worked example, the concessionaire and Figurewith the prevailing[x]. Example regulatory function. Profit Share Mechanism stakeholders share profit achieved between an 8% and 12% margin equally. Between 12% and 15%, stakeholders Any payment and performance mechanism creates share 75% of the profit achieved, and surplus profit its own incentives and calibration is key, including achieved beyond a 15% margin is shared fully with Aspecificationirport Profit of profit margin measurement, accounting stakeholders, particularly customers and consumers in treatments, and mechanisms (for example) for financing the form of lower charges. investment. 100 Stakeholder Share As demonstrated in Figure 14 (“Example Profit Share Payoff Diagram”), this creates an effective profit cap at the Conclusions1 2 Stakeholder Share upper threshold. Increases in profit margin beyond 15% Con. do not result in additional return to the concessionaire, Contractual12 mechanisms to share profit and protect 0 0 Stakeholder with the proceeds being returned annually through a against excess profitConcessionaire can incentivizeShare collaboration pre-agreed arrangement to customers and consumers between8 concessionaires, government and consumers through reduced charges in the next annual reporting to improve performance and improve financial 100 Concessionaire period. outcomes for all stakeholders. FigureThis mechanism [x]. Example would therefore provideProfit incentive Share to Mechanism Share of Return concessionaires to increase efficiency, but protection for Concessionaire Share Stakeholder Share

Figure 13: Example Profit Share Mechanism Figure 14: Example Profit Share Payoff Diagram

Airport Profit Airport Profit

Concessionaire Return Stakeholder Return 100 Stakeholder Share

1 1 2 Stakeholder Share Con. 12 12 0 0 Stakeholder Concessionaire Share 8 8

100 Concessionaire

0 Share of Return Share of Return

Concessionaire Share Stakeholder Share

Airport Profit

Concessionaire Return Stakeholder Return

0 Share of Return 53 Balanced Concessions for the Airport Industry

Consultation Processes Conclusions

Mechanisms for consultation and dispute resolution It is recommended that consultation requirements between concessionaires, customers and consumers are are embedded in concession contracts at defined often not sufficiently-defined within concession contracts intervals and milestones. or their regulatory frameworks.

Given the nature of airport assets being built to serve their customers and consumers there are substantial touch- Capital Planning and Execution points between concessionaires and their customers in both strategic decision-making, for example long-term Overall IATA supports efforts to facilitate appropriate capital planning and development programs, and in day- investment in airport infrastructure and address capacity to-day operations and management. growth challenges. However, airport infrastructure development is unique, its costs are not linear or modular, IATA has published extensively on the topic of and there are many aspects that impact the complexity consultation and collaboration. Recommended reading of any airport design and development which need to be for decision-makers includes “Airport Infrastructure addressed on a site-specific basis. Airport development Investment – Best Practice Consultation” 12. This models can vary significantly based on customer service demonstrates the significant benefits of improved needs for passenger handling, baggage, cargo and ground consultation and collaboration between concessionaires handling. These requirements, alongside requirements and customers at all stages of the project lifecycle. for security, immigration and customs, can greatly impact the airport design for a given market. For these reasons, Consultation in the capital investment plan (both in the to improve capital efficiency, consultation with customers initial airport planning for a greenfield airport and in is required across all capital investment planning and capital expansion of an operational airport) is critical to execution processes from initial design, through detailed ensure a business case that demonstrates an appropriate design, construction and development, and ongoing Return on Investment (“ROI”) for all parties. Without this capacity augmentation through the life of the airport. consultation and a business case explicitly agreed by all parties, concessionaires are at risk of inefficient or Initial Planning and Concession Design poorly-timed investments which reduce their returns and increase costs to customers and consumers. This can Customers have a unique perspective on traffic forecasts also lead to undermining broader economic benefits to and opportunities for a national aviation industry. It is the communities the aviation industry serves. recommended that government decision-makers involve customers, the airport operator and the investment In operations, collaborative decision-making supported by community, in the development of the national aviation data sharing can also yield significant efficiency benefits, strategy. This by extension will require them to be involved improving on time performance (“OTP”), punctuality, and in the development of the strategic business case that improved consumer experience. Implemented effectively identifies requirements for new airport infrastructure and and with the right consultation in advance, airport greenfield airports. This helps to ensure that the overall collaborative decision-making can improve outcomes for aviation system is optimized with respect to major new all stakeholders. capital investment at a national level, and provides a further scrutiny to the traffic forecasts which support the Consultation means more than transparency alone. business case for new investment. Transparency refers to the sharing of relevant and detailed information at various stages in the process. Consultation, It is also recommended that customers are involved in on the other hand, implies engagement early in the defining the project’s requirements and procurement decision-making process, including at the concept stage, activities. There is a clear benefit to involvement of to ensure shared hypotheses are used in design choices customers in the definition of project requirements prior and business cases. Engagement after major investment to the tendering process, and also in the evaluation of decisions have been made would not meet the definition bidders’ concept design submissions. of consultation.

12 www.icao.int 54 Balanced Concessions for the Airport Industry

Further detail on the required submissions from bidders is It is recognized that government contracting authorities included in APPENDIX 4 (“Qualitative Bidding Framework”). need to demonstrate value for money through Involvement in both of these stages by customers, the procurement of the concessionaire, and therefore may be ultimate users of the proposed asset, supports the right- reluctant to give excessive flexibility to the winning bidder sizing of capital investment plans to provide appropriate to change output specifications and investment plans airport assets and associated level of service at the right after the award of the concession contract. However, price for the market. outcome-focused contractual mechanisms can be used to safeguard against this and provide incentives to improve Airport Design, Development and Construction CAPEX efficiency and evidence improved value for money outcomes whilst ensuring the delivered solution meets the Once a concession contract is awarded and the strategic objectives of the government. concessionaire moves from concept design through the iterative stages of airport development to detailed design For example, benefit or gainsharing mechanisms could and the execution of capital investment plans, continued be incorporated within concession contracts to share consultation with customers in the design process and benefits of improved CAPEX efficiency during the ongoing refinement can support CAPEX efficiency to the detailed design phase which are agreed between the benefit of all stakeholders. concessionaire, government and customers. Financial gains could be shared with reference to the original The consultation process to develop the detailed design bid model prior to design freeze, at which point the in order to deliver cost efficient solutions that meets capital delivery risk in construction would reside with customers’ needs is critical, taking into account the the concessionaire. This mechanism would encourage trade-offs between service quality, performance and all parties to work together to improve the efficiency of costs. Flexibility is required during this stage to identify design and share the associated financial benefits, without the optimal design and construction plan, reflecting the increasing risk to the concessionaire. iterative nature of airport infrastructure development. Whilst they form an important part of the evaluation of It should further be noted that this involvement should the preferred concessionaire, it is recommended that be early and prior to design freeze; a key cause of cost capital investment plans should not be overly-rigid so overruns in many airport capital programs are ongoing as not to restrict innovation through collaboration with change requests from stakeholders during construction, stakeholders. which should be minimized unless critical.

Ongoing Capacity Augmentation: Case Study: Fraport Greece Aegean Regional CAPEX Trigger Mechanisms Airports Concession Another issue identified in some concession contracts Fraport Greece is responsible for maintaining, is the lack of triggers for new capacity requirements, operating, managing upgrading and developing or alternatively overly-fixed and pre-determined trigger 14 regional airports in Greece over 40 years, with mechanisms. This is a particular challenge for the aviation operational transfer taking place in April 2017, under industry; the rapidly changing nature of the industry two separate concession agreements. means that over the duration of an airport concession airlines need to innovate their offering to continually As part of these arrangements, Fraport Greece are attract passengers in an ever-competitive market, and responsible for €330 million investment until 2021. consumer expectations of the end-to-end passenger The agreement includes a contractual obligation to experience change rapidly. complete fixed expansion works within 48 months of the concession commencement date. As identified by IATA’s “Airport Infrastructure Investment – Best Practice Consultation” document, “investments IATA has identified that the fixed nature of these should only proceed where a clear business case exists, expansion plans have led to investments which could supported by a positive cost benefit analysis”. This have been more efficient. allows for robust evidence-based decision making for capital investment plans which, with the inputs of key Source: Aegean Regional Airports – Cluster B, 1st stakeholders including government, regulators and Annual Report on Environmental Strategy, July 2017; customers, can secure improved outcomes for all. www.hellenicparliament.gr; IATA Analysis 55 Balanced Concessions for the Airport Industry

However, the triggers for formalized governance and Case Study: Athens International Airport (“AIA”) consultation processes for capital investment and the form of these mechanisms can vary significantly and are AIA has a set trigger threshold for an independent often poorly-specified in airport concessions leading to passenger demand forecast. This is expressed as sub-optimal outcomes across the airport ecosystem, a percentage (90%) of the design capacity (100%). including unnecessary infrastructure build. In 2016, this trigger threshold was reached with 18.9 million passengers in the preceding 12 months One solution which can support the Balanced Concession as compared to the previously-established 100% model and help all parties achieve “win win” outcomes capacity level of 21 million. through improved efficiency involves a trigger threshold for an independent demand and capacity assessment Once this trigger threshold was reached, AIA and consultation process, before activating any future commissioned IATA to undertake an independent capacity to enable traffic growth at the agreed service demand forecast and capacity assessment for levels. A version of this mechanism is used in Athens. the subsequent two years to determine whether capital investment was required to remain within the 90% threshold. The independent study by IATA determined that following planned technological and organizational improvements, a small expansion, and once the satellite terminal commenced operations, the AIA would be able to handle 26 million passengers. Therefore the independent assessment demonstrated no need for major capital investment, and a re- baselining of annual passenger capacity for future trigger points as AIA continues to grow.

Source: 2016 Annual Report, AIA Figure . Fleile CAPEX Trigger Mechanism Figure 15: Flexible CAPEX Trigger Mechanism

Recalculated Trigger Threshold

Additional CAPEX Requirement Capacity Trigger Point

Design Capacity

12-month avg. x threshold

PAX GrowthCapacity Impacting Trigger Threshold

Capacity Review (Operational Improvement or Investment Planning Process)

Capital investment at commencement of concession period Capital investment following planning process, if deemed required

Capital Expenditure Elapsed time from trigger point to alleviation if capital investment required

Concession Period 56 Balanced Concessions for the Airport Industry

The mechanism used in Athens effectively triggers a Ongoing Capacity Augmentation: CAPEX Delivery review of the existing infrastructure to evaluate if the previous value for design capacity is still valid and capacity Once a robust business case is developed and agreed augmentation is needed, or if the design capacity can be to support a major capital investment, an important adjusted based on operational changes, use of technology, consideration is the attribution of risk for the capital or minor capital works. This recognizes the fast-pace of delivery program. technological change in the industry which may mean operational improvements and efficiencies offset the need The concessionaire is responsible for the capital program for expensive capital investment programs; all alternative and is compensated for this risk through a reasonable solutions should be first explored to minimize CAPEX return on capital invested. Consequently, it is reasonable requirements. Contractual mechanisms such as this, which that the risks from under-performance in the capital incorporate a degree of flexibility in capital expansion and program are not passed on to the customer or consumer encourage alternative operational solutions to deliver nor should the government take a level of risk that should incremental capacity, are recommended. be the responsibility of the concessionaire.

Figure 15 (“Flexible CAPEX Trigger Mechanism”) To enable this, it is recommended that independent demonstrates graphically how this mechanism works in CAPEX assessments are incorporated within the business practice. It is important for government decision-makers case based on best practices to provide assurance that to consider the appropriate level of the trigger threshold, the business case represents value for money, and that and mechanisms within the contract to re-evaluate this the business case is agreed and finalized alongside a threshold based on airport passenger growth rates and design freeze to provide an agreed cost baseline. The forecasts, and their change over time. concessionaire can then be responsible for cost overruns or savings generated by poor or effective management of Higher thresholds can be applied to airports with relatively the capital program. stable and lower growth rates. However, it is clear that in markets and airports experiencing double-digit growth Further, it is recommended that a competitive process is rates and growth in excess of 20%-30% that airport required for the procurement of construction contractors capacity would likely be breached before new capital and sub-contractors to ensure arms-length and best assets are operational given the length of the planning value commercial arrangements, particularly for instances and development cycle for major capital investments. where a concessionaire has affiliated or group companies Lead times can be up to 10 years due to planning who may bid for the construction contracts. Within permissions, design development, environmental, build Europe, for example, many airports have historically been and commissioning needs, and demand is unpredictable subject to certain public utilities procurement rules which and fluctuates over time. Given these factors, a lower require specific competitive procurement principles trigger threshold than used in Athens may often be and processes to safeguard public value for money in required; this should be assessed and addressed during sectors with limited competition. Similar requirements for concession design. What is critical is a trigger process transparent and robust procurement are recommended flexible enough to accommodate change in demand over for airport concession contracts. time, with the objective to provide balanced capacity with airline customers’, which in turn will ultimately support Ongoing Capacity Augmentation: Late-Life CAPEX efficient outcomes. Appropriately incentivizing capital investment late in the Further, such trigger mechanisms should complement life of a concession is a particular issue, which is common contractual requirements for regular traffic forecast reviews across concessions in many infrastructure sectors. to reflect changes in the market, with a formal review every five years as a minimum and an annual check. ICAO and The main reason is the mis-match in timing between the IATA best practices also recommends a master plan review use of long-lived assets, which may last 20-30 years or every five years to ensure infrastructure will continue to more, and the ability of a concessionaire to generate meet demand and deliver the required functionality. It is sufficient returns to justify the investment from the recommended that both traffic forecasts and master plans balance of the concession period. should be meaningfully consulted upon and agreed with airline customers, and these requirements incorporated This challenge is shown in Figure 16 (“Late-Life Capital into concession contracts. Traffic forecasts should be Investment Requirements”), below. Here there is a new independently verified by an expert, external consultant. capital investment requirement identified beyond typical 57 Balanced Concessions for the Airport Industry

replacement expenditure (“REPEX”) costs. This may Airport concessions often lack an effective financial and be due to a required capital expansion to meet latent commercial mechanism to incentivize the realization demand, longer-term traffic growth, and/or because of a of this “win-win” with the benefits shared appropriately need to replace capital assets reaching the end of their between stakeholders. This is typically a challenge with useful life. Without this new CAPEX the value of the airport all major capital investment requirements, but becomes as a whole may decline as capital assets expire, become more acute as the concession contract reduces the less efficient and more costly to maintain towards the end available time for the concessionaire to realize the value of their useful life. of its investment. A reduction in the time over which a concessionaire will amortize its investment, which will There is therefore additional value for all stakeholders reflect the remaining term of the concession rather than from the incremental value realized from this new capital the useful life of the new assets, means a concessionaire investment. The value of the airport, at reversion to without a specific incentive mechanism in the contract government at the end of the concession term, will would only undertake this by passing additional charges to increase whilst the concessionaire will benefit from customers and consumers. In the absence of the ability to improved capacity and revenues for the remainder of do this, the concessionaire is likely to under-invest, which the concession term. However, this may not adequately would adversely impact all stakeholders. justify the investment resulting in a reluctance to invest. Customers and consumers will benefit from fit-for- A range of potential solutions have been proposed purpose infrastructure at the right price for far longer than to address this issue. These include allowing the the term of the existing concession period. concessionaire to levy additional aeronautical charges to Figure . Late-Life Capital Investment Requirements

Figure 16: Late-Life Capital Investment Requirements

CAPEX ($) Asset Capital Value ($)

Increase in asset capital value with new CAPEX

Original CAPEX Requirement Incremental Value

Asset capital value without new CAPEX

New CAPEX Requirement

REPEX

Concession Start Time Concession End 58 Balanced Concessions for the Airport Industry

amortize its investment over the remaining concession Conclusions life. These will typically be far in excess of the long-term cost of the new airport infrastructure if amortized over There is a significant benefit to the involvement of its useful life instead. Other proposals include extending customers in airport planning and airport construction the concession period to facilitate the appropriate return and development. on investment for the concessionaire over the useful life of the capital asset. However, given the long-term There should be sufficient flexibility to amend nature of airport capital investment and the fact that capital investment plans after contract award to a new capital requirements may be identified at multiple concessionaire prior to a design freeze, but these times during a concession, this is likely to result in should include pre-defined benefit or gainsharing reduced levels of re-tendering for concessionaires and mechanisms in the contract and subject to agreement increase the monopolistic tendencies of the sector and between the concessionaire, government and potentially ignores the value of the airport business that customers to prevent under-investment. will be handed back to the government at the end of the concession (“reversionary value”). Flexible CAPEX trigger mechanisms with consultation requirements and provisions for independent third The Balanced Concession proposes that any potential party assessments enable a better outcome for solution be bound by principles that work for all concessionaires and customers. stakeholders, including: Mechanisms are required within concession 1. Appropriate return on investment for the contracts to specifically ensure any necessary capital concessionaire over the concession period investment is delivered late in the concession life. The specific mechanism will vary by circumstance, but 2. Meeting the requirement of customers and needs to pass four key principles to safeguard the consumers for new capital assets interests of all stakeholders. Solutions are identified which achieve this: 3. Maximizing the reversionary value of the airport asset for government 1. Government funding of CAPEX

4. Payment for infrastructure over its useful life not the 2. Government commitment to pay amortized value concession life of capital investment at concession end, either directly, through a new concessionaire, or with Government financing of late-life capital investment, capital market solutions recognizing that government stands to benefit from the value of the airport on its reversion at the end of the concession term, is one mechanism that would meet these criteria. However, it is recognized that this solution may be prohibited by government budgetary constraints.

Alternatively pre-agreeing the amortization profile of the asset to determine the reversionary value at the termination of the concession is an alternative. This could either be paid by government at the end of the concession, paid for by a new concessionaire who could then finance the asset over its remaining useful life, or privately-financed capital market solutions could be used to novate the loan to a new concessionaire. Such solutions would be relatively innovative and would need to be developed with the debt markets to ensure appropriate security (and, for example, government guarantees), financing efficiency, and reflect the financial products available in different markets. 59 Balanced Concessions for the Airport Industry

Continual Improvement Conclusions and Airport Service Quality Concession contracts should be outcome-focused and include frameworks for airport service level As identified in IATA’s policy guidance on Airport Service agreements and specify mechanisms to incentivize Level Agreements (“Airport Service Level Agreement – Best continual improvement and adjustment to service Practice”), there is a requirement for airport SLA frameworks levels. to be incorporated in concession contracts as a basis for the transaction structure. These help to ensure there is a IATA’s “Airport Service Level Agreement (“SLA”) – focus on outcomes and the required service standards Best Practice” policy guidance document includes are consistently delivered in return for charges paid by commentary on best practices that should be customers. Airport service level agreements set clear considered. customer requirements on a user pay principle, ensuring that the customers pay on an outcome-basis for a given level of service and concessionaires benefit from meeting customer requirements and not under or over-servicing.

Built on an approach of openness, transparency and collaboration between concessionaires and customers, they can also promote a culture of continuous improvement in service quality and the ability to adapt to ever-changing passenger expectations. The rapidly changing dynamics of the aviation sector and the increasing ability to leverage technology to meet airport service quality require SLAs to be flexible and dynamic whilst ultimately achieving the strategic objectives of the concession and the predetermined outcomes.

IATA’s policy guidance paper covers best practice elements that should be incorporated in airport service level agreements, defined by function:

• Scope, covering queuing, asset availability for passenger sensitive equipment (“PSE”), asset availability for other equipment, passenger experience

• Critical operational assets and periods

• Defined methods of measurement, with quantitative and automated measurements used wherever possible

• Level of service rebate mechanisms

• Clear definition of any exclusions, for example force majeure 60 Balanced Concessions for the Airport Industry

Key Takeaways

There are numerous mechanisms and approaches which can be used to make airport concessions more balanced, and present “win-win” outcomes for all stakeholders to a concession.

Selection of Airport Concessionaires Concession Payments and Charges

• The selection of concessionaires should be based on • Governments should implement effective economic a balanced scorecard approach and not on financial regulation ahead of the concession. evaluation alone. • Methodologies for setting charges should be in • The evaluation model and specific mechanics should accordance to ICAO’s policies and building block be defined in the government business case to justify methodology. the preferred approach. • Levels of concession payments to government • Stakeholders should be involved in this decision given should be justified based on services and a detailed the significance of choice of selection methodology for value for money assessment. IATA prefers ongoing customers and consumers. Involvement of customers concession fees be paid by concessionaires as and industry stakeholders in the development of opposed to up-front payments as it reduces the bidder selection criteria and evaluation is critical. potential risk associated with the political business cycle and potential short term incentives for • Expert panels should be involved in evaluation, with governments. benefits to inclusion of customers and other key stakeholders to the concessionaire selection. • Under this principle, concession payments should not be the primary bid parameter. Determinants of Concession Length Super-Profit Protection • Historically airport concessions can suffer from unduly long and arbitrary concession lengths. • Contractual mechanisms to share profit and protect against excess profit can incentivize collaboration • The optimal concession length concession length between concessionaires, government and should be determined and justified through the consumers to improve performance and improve government business case with reference to detailed financial outcomes for all stakeholders. quantitative financial and economic analysis that recognizes the trade-off between different strategic • The success of a profit sharing contractual objectives and stakeholders. mechanism is dependent on open book accounting and transparency regarding the financial performance • Increasing concession payments to government are a of the concession, and expertise and experience common motivation for increasing concession length; in contract management to effectively oversee the concession payments should be justified and should mechanism, with appropriate governance processes not be a primary variable to determine concession embedded within the contract. length. Consultation Processes • Governments should also consider the ultimate benefit the airport will create for the government and • Historically mechanisms for consultation and dispute the wider economy through increased economic resolution between concessionaires, customers and activity, and once it reverts to government ownership consumers have not been sufficiently-defined within at the expiry of the concession. concession or their regulatory frameworks.

• Reversionary value of the airport to the government • Consultation and collaboration between should be incorporated into the government business concessionaires and customers at all stages of the case for the granting of the concession. concession lifecycle, from capital investment planning to operational decisions, can generate significant benefit for all.

• Consultation processes and outcome-based airport service level agreements should be embedded within concession contracts. 61 Balanced Concessions for the Airport Industry

• Concession contracts should require a business case Continual Improvement and Airport Service Quality for capital investment, to be agreed by all parties. • Concession contracts should be outcome-focused • IATA has published extensively on the topic of and include frameworks for airport service level consultation and collaboration. Recommended agreements and specify mechanisms to incentivize reading for decision-makers includes “Airport continual improvement and adjustment to service Infrastructure Investment – Best Practice levels. Consultation” 13. • IATA’s “Airport Service Level Agreement (“SLA”) – Capital Planning and Execution Best Practice” policy guidance document includes commentary on best practices that should be • As airport users, customers should be involved considered. in defining the project’s requirements prior to the tendering process, and also in the evaluation of bidders’ concept designs.

• Once a concession contract is awarded and the concessionaire moves from concept design through the iterative stages of airport development to detailed design and the execution of capital investment plans, continued consultation with customers in the design process and ongoing refinement can provide further benefits and supports CAPEX efficiency.

• Capital investment plans should not be overly-rigid within the concession contract to restrict innovation through collaboration with stakeholders.

• Fixed future capital investment during the concession should not be pre-defined in the concession contract. A trigger threshold should be used or an independent demand and capacity assessment and consultation process, before activating any future capacity.

• This should complement contractual requirements for regular traffic forecast reviews, with a formal review every five years as a minimum, and an annual check.

• A competitive process should be required for the procurement of construction contractors and sub- contractors to ensure arms-length and best value commercial arrangements.

• Contractual mechanisms should be in place to incentivize late-life capital investment towards the end of the concession term. These could include government funding of CAPEX, or a government commitment to pay amortized value of capital investment at concession end, either directly, through a new concessionaire, or with capital market solutions.

• Once there is an agreed design freeze for any capital investment, the concessionaire should be responsible for cost overruns.

13 www.icao.int 62 Balanced Concessions for the Airport Industry

Appendix 1.

Typical PPP and Concession Models and Airport Sector Archetypes 63 Balanced Concessions for the Airport Industry - . 15 mended. Airport Achetype or management capability. be similar to a DBFOM/BOOT model. a DBFOM/BOOT be similar to lity, but government financing capacity. financing but government lity, - not recom of assets – permanent transfer N/A Built-Operate-Own (“BOO”) : This model is similar Built-Operate-Own with no but is a perpetual concession a BOOT, to government. to of assets transfer (“O&M”) : Under and Maintenance Operations for is responsible this model, a concessionaire of the airport asset. and maintenance operations the above, of a DBO/BOT the interpretation Unlike with both associated risks takes concessionaire and costs. revenue from under-performance and requiring specialist and requiring under-performance from responsibility for capital works; as these become become as these works; capital for responsibility Existing operational (brownfield) airport suffering (brownfield) Existing operational Greenfield airport with significant capital require airport capital with significant Greenfield ments and limited government financing capacity financing government ments and limited more significant (for example, in the case of a new of a new case in the example, (for significant more management and operational capability. In certain capability. management and operational cases, O&M contracts may include concessionaire include concessionaire may O&M contracts cases, runway and significant terminal expansion) this may expansion) this may terminal and significant runway Greenfield airport with limited management capabi - airport management with limited Greenfield

• • √ √ √ √ & Capability Operational Operational Management √ √ √ Capital Delivery Delivery Cpability √ √ Government Requirements Addressed Requirements Government External Financing - : Similar to a : Similar to (“BOOT”) Built-Operate-Own-Transfer sector model, this typically DBFOM includes private project. to a greenfield financing and is often applied and operates / concessionaire sector The private of the contract, the duration for maintains the asset at the end of government to and it is transferred term. contract Design-Build-Finance-Operate-Maintain is sector : Under this model, the private (“DBFOM”) financing, building, designing, for fully responsible the for and maintaining the asset operating to it is transferred a BOOT, Similar to term. contract term. at the end of contract government • • (“BOOT”) Conventions* Model Naming Model rate-Transfer (“BOT”) rate-Transfer Built-Operate-Own (“BOO”) Built-Operate-Own Operations and Maintenance (“O&M”) and Maintenance Operations (“DBFOM”) / Built-Operate-Own-Transfer / Built-Operate-Own-Transfer (“DBFOM”) Design-Build-Finance-Operate-Maintain Design-Build-Operate (“DBO”) / Built-Ope - (“BOOT”)sign-Build-Finance-Operate-Main tain (“DBFOM”) / Built-Operate-Own-Transfer / Built-Operate-Own-Transfer tain (“DBFOM”) ) PPP Modalities Facility ( PPIAF, Advisory Infrastructure ); Public-Private Maintain Design-Build-Operate (“DBO”) : Under this model, with assets, new and finances owns government design, build and for the PPP partner responsible / specifications. defined outputs levels to operation operations, for fee an operating pays Government with the government. reside risks and revenue (“BOT”) : This model is Built-Operate-Transfer In different project. a greenfield typically applied to distinctions drawn different are there literature responsibilityfor of financing and on the source as a in this table is interpreted operations; by the private asset, operated government-financed a DBO. similar to sector, Operate • • : 14 Finance Build Responsibilities by Project Participant Project by Responsibilities PPP Partner Government / Government Asset Ownavaer Asset Concessionaire / Concessionaire Perpetual models (BOO) are excluded from this analysis; from excluded are models (BOO) Perpetual projects BOT to projects similar to describe used are countries common law countries, but in term in civil law is a specific “concession” A forms of PPP. All models identified are Responsibility Key: Responsibility * Acronyms as follows * Acronyms Design Sources: World Bank Group Legal Resource Centre ( PPPLRC Centre Resource Legal Bank Group World Sources: Notes 1. 2. 14 64 Balanced Concessions for the Airport Industry

Appendix 2.

Mapping Stakeholder Interests in an Airport Concession 65 Balanced Concessions Industry for theAirport

Airport Design, Airport Concession Initial Planning Airport Operations Pricing of Airport Ongoing Capacity Development Termination & Transition Lifecycle & Concession Design & Management Services Augmentation & Construction

• Efficient, safe and secure • Continued capital • Fit-for-purpose airport operations • Construction to agreed investment to maximize • Limited government • Regulatory compliance time and scope • Maximize revenue share • Timely capacity to asset value financial contribution • Economic value and job • Minimized negative • Economic value and job absorb demand for • Continuity of operations • Maximize concession fee creation Government / stakeholder impact creation economic value and job at asset transfer • Maximize upfront fee • Optimal customer Asset Owners • Fit for purpose facilities • Optimal regulations creation • Optimal condition of (trade-off vs. recurring experience for all and “future proofed” aligned to govt.’s • Limited/ no government asset at transfer fee) stakeholders (technology and strategic objectives contribution • Limited/ no required • Stakeholder satisfaction • Catalytic effect to the capacity) capital investment at • Sustainable solution broader development of reversion the aviation sector

• Decision autonomy • Minimized operational • Maximize investment expenditures return • Maximize charges • Maximize revenues • Minimize investment risk defined by • Development of aviation • Favorable concession • Construction to agreed concessionaire • Maximize return until the business and passenger • Investment certainty design and terms for time and budget, • Limited or no restrictions end of the concession flow to maximize asset (pre-defined capex concessionaire assuming charges are on setting airport • Minimize capital Concessionaire value triggers) • Minimized demand fixed charges investment if non- • Limited regulatory • Investment flexibility / risk and maximized • Design scope flexibility • Limited or no regulatory recoverable or below oversight decision autonomy catchment • No planning risk oversight required ROI • Loosely defined service • First right of refusal of • Clarity on the regulatory standards future competing airport framework in place • Limited penalties for developments non-performance of SLAs

• Specifications for safe • Cost based pricing on an and secure operations efficient basis, while still • Contract compatible with • Efficient, safe and secure ensuring investment is regulation operations Regulator • Alignment with financeable • Capex efficiency • OPEX efficiency planned • Regulatory compliance • No disruption to (Economic specifications approved • Open and transparent • Capacity for safe and into airport development • Open and transparent operations on handover and Safety) • Capex efficiency information secure operations plans information • Safeguard consumer • Defined role of the • Regulatory step-in rights interests regulator in the • Regulatory step-in rights concession design 66 Balanced Concessions for the Airport Industry 67 Balanced Concessions for the Airport Industry Transition Termination & Termination No disruption with associated and termination transition No increase in fares in fares No increase of goods and or costs services No unjustified increase No unjustified increase in charges • • No disruption in services • • No disruption in services • Augmentation Ongoing Capacity Transparent Transparent on project information Engagement on ESG impacts Efficient passenger passenger Efficient convenience and flow in fares No increase of goods and or costs services No unjustified increase No unjustified increase or pre- in charges funding appropriate Input to design • • • • • Capex efficiency • Capex • • Services Pricing of Airport Pricing Economic value and value Economic job creation Minimize costs of costs Minimize goods and services Value for money money for Value (cost-efficient charges service a desired for in line with ICAO level) policies and principles No unnecessary or in charges increase pre-funding Independent and robust transparent regulator • • Minimize fares • Minimize • • • Single till regulation • • & Management Airport Operations Airport Operations Limited emission and Limited impact noise and value Economic job creation Efficient passenger passenger Efficient convenience and flow Good consumer and (goods experience services) Value for money money for Value (cost-efficient charges service a desired for level) and Good customer experience consumer • • • • • Fit-for-purpose airport • Fit-for-purpose • • efficiency • Operational Development Development & Construction Airport Design, Construction to Construction to budget time, agreed and scope Passenger centric centric Passenger design Service offering passenger aligned to requirements Construction to Construction to budget time, agreed and scope centric Customer design and cost efficiencies Service offering customer aligned to requirements • ESG • Optimized impacts • • • efficiency • Capex • • Initial Planning Transparent Transparent on project information Engagement on ESG impacts Fit-for-purpose airport, Fit-for-purpose airline that maximizes and competition destinations served Input to appropriate appropriate Input to design OPEX efficiency airportplanned into plans development & Concession Design & Concession • • • • Fit-for-purpose airport • Fit-for-purpose • • Lifecycle Consumers Consumers (Passengers) Communities Customer (Airlines) Customer Airport Concession Airport Concession 68 Balanced Concessions for the Airport Industry

Appendix 3.

Issues and Solutions Across Concession Lifecycle 69 Balanced Concessions for the Airport Industry Balanced Concession Solution(s) Concession Balanced Customer engagement in requirements, initial design and engagement in requirements, Customer forecasting and bidder criteria in selection involvement Customer evaluation Customer engagement in requirements, initial design and engagement in requirements, Customer forecasting to airportservicefor change level Defined governance agreements Defined governance for change to airport service level to airportservicefor change level Defined governance agreements Detailed government business case (including procurement (including procurement business case Detailed government strategy) Detailed government business case (including procurement (including procurement business case Detailed government payment) concession of and justified level strategy, and bidder criteria in selection involvement Customer evaluation non- account into take to scorecards Usage of balanced criteria) technical financial (i.e. • Detailed government business case • Detailed government length concession for • Clear rationale • Customer engagement in national aviation planning engagement in national aviation • Customer • • bidder evaluation to approach scorecard • Balanced • defined with customers agreements • Airport service level • • Airport service level agreements defined with customers agreements • Airport service level • • • • bidder evaluation to approach scorecard • Balanced fee concession other than highest • Usage of financial criteria • Impact Initial Planning and Concession Design Initial Planning and Concession Potential risk of all design requirements not being captured not being captured risk of all design requirements Potential in the future can arise issues that of potential identification Inappropriate setting of service levels will increase cost of cost will increase levels of service setting Inappropriate experience or poor passenger operations customer Concessionaire only focuses to meet the output based KPIs meet the output based to only focuses Concessionaire This and consumers. customers by required and not outcomes time particularly over levels, service unacceptable in result may change as the industry requirements Focus only on cash returns for government, without reference without reference government, for returns only on cash Focus and long-term economic levels service provided, services to add value • Redundancy in concession terms over time over terms in concession • Redundancy for government • Lack of flexibility • • • • Limited scope for global best practices to be introduced to global best practices for scope • Limited abuse power risk of market • Potential • Issue Long and arbitrary concession length and arbitrary concession Long Limited stakeholder engagement in development of engagement in development stakeholder Limited concessions Limited consultation with customers in setting of service quality of service in setting with customers consultation Limited levels and performance levels Focus on output-based KPIs rather than outcome-based than outcome-based KPIs rather on output-based Focus measures performance Limited participation bid process Limited in concession Excessive focus on highest concession fee in bid evaluation fee on highest concession focus Excessive 70 Balanced Concessions Industry for theAirport

Issue Impact Balanced Concession Solution(s)

Airport Design, Development and Construction

• Customer engagement in the development of detailed design Limited mechanisms for collaboration to optimize capital plans • Inadequate or inefficient facilities being developed and service quality and detailed design • Limited incentive to improve airport design and share benefits • Benefits sharing mechanism for design efficiencies • Customer role in ORAT

• Customer engagement in long term master plan and phasing strategy Inadequate provision for a long-term airport master plan and • Concessionaire short-term incentives may result in airport not • Clearly defined demand trigger and business case process for phasing strategy meeting long-term capacity requirements most efficiently airport expansion • Formalized governance and consultation processes

• Customer engagement in detailed design • Over or under investment resulting in higher charges or poor • Clearly defined demand trigger and business case process for Overly-rigid construction schedules and plans service levels airport expansion • Formalized governance and consultation processes

• Customer engagement in detailed design • Clearly defined demand trigger and business case process for Over-investments undermining cost-efficiency • Higher charges for customers and consumers airport expansion • Formalized governance and consultation processes 71 Balanced Concessions Industry for theAirport

Issue Impact Balanced Concession Solution(s)

Airport Operations and Management

• Airport service level agreements defined with customers • Defined governance for change to airport service level • Customers and consumers issues and concerns not agreements Limited collaborative decision-making appropriately addressed • Incentivization mechanism for continual improvement • Lack of coordination resulting in inefficient operations • Transparent and real time data sharing • Benefits sharing mechanism for efficiency gains

Limited information sharing provisions • Inefficient operations for customers and concessionaires • Mandated transparency and real time data sharing

• Airport service level agreements defined with customers • Defined governance for change to airport service level • Redundant technology at the airport, creating inefficient agreements Limited positive incentivization for innovation operations and undermining the competitiveness and growth • Incentivization mechanism for continual improvement of the aviation sector as a whole • Benefits sharing mechanism for efficiency gains • Airport-specific performance monitoring and performance benchmarking

• Refinancing benefits accruing to concessionaires and government, rather than being passed to customers and No refinancing gain mechanisms • Benefits sharing mechanism for refinancing gains consumers through reduced charges on the basis of the principle of cost-relatedness

• Aviation ecosystem suffer from inefficient operations and • Airport service level agreements defined with customers Overly-rigid SLAs and performance specifications potentially inadequate service levels, rather than providing the • Defined governance for change to airport service level right services at the right price agreements

Limited provision for Environmental, Social and Governance • Negative impact on community based on inadequate • Defined ESG obligations for concessionaire (“ESG”) factors obligations on concessionaire 72 Balanced Concessions for the Airport Industry Balanced Concession Solution(s) Concession Balanced Detailed government business case (including rationale for for (including rationale business case Detailed government regime) and charge bid parameter proposed charges, Regulatory framework in tender documentation (intended documentation (intended in tender framework Regulatory tender principles for clarity on regulatory market provide to contract) regulation in than defining all rather process, Regulatory framework in tender documentation (intended documentation (intended in tender framework Regulatory tender principles for clarity on regulatory market provide to contract) regulation in than defining all rather process, register asset and fixed reporting Financial applicable) where assets, regulated support(to definition of Customer involvement in selection criteria and bidder criteria in selection involvement Customer financial bid parameter) (including proposed evaluation • Pricing aligned to ICAO principles ICAO aligned to • Pricing regulator independent economic • Effective • • • Pricing aligned to ICAO principles ICAO aligned to • Pricing mechanisms protection • Superprofit regulator independent economic • Effective • Implementation of single till mechanism • User pay principle adopted pay • User • regulator independent economic • Effective • regulator independent economic • Effective • Impact Pricing of Airport ServicesPricing Potential for excess profits or, conversely, airport conversely, or, profits excess for Potential investment reduce to and incentives underperformance Charges may be increased excessively by the concessionaire the concessionaire by excessively be increased may Charges and customers affecting adversely power, market given consumers Unnecessary burden on current customers and consumers to to and consumers customers on current Unnecessary burden infrastructure fund the future Regulator constrained in amending basis of regulation by by in amending basis of regulation constrained Regulator or limited profits in excess resulting contract, concession concessionaire for incentives improvement performance Changing the scope of regulation (till) from a single or hybrid to to a single or hybrid (till) from of regulation Changing the scope to be higher tariffs aeronautical cause dual till may a pure • Charges misaligned to ICAO principles ICAO misaligned to • Charges • • • • • Issue Limited rationale for aeronautical charges aeronautical for rationale Limited Excess profits on non-regulated aviation charges on non-regulated profits Excess Pre-funding of airport investments Pre-funding Constraints placed on effectiveness of regulation of on effectiveness placed Constraints Changes in the regulatory till Changes in the regulatory 73 Balanced Concessions for the Airport Industry Balanced Concession Solution(s) Concession Balanced Clearly defined demand trigger and business case process for process case Clearly defined demand trigger and business airport expansion Clearly defined demand trigger(s) and business case process process case Clearly defined demand trigger(s) and business airportfor expansion Clearly defined demand trigger and business case process for process case Clearly defined demand trigger and business airport expansion • Formalized governance and consultation processes and consultation governance • Formalized • • processes and consultation governance • Formalized • processes and consultation governance • Formalized • Financing mechanism for late-life CAPEX late-life mechanism for • Financing resolution • Multi-stage dispute • Transition contractual provisions contractual • Transition Impact Termination and Transition Termination Ongoing Capacity Augmentation Under-investments may cause major operational issues for all issues for major operational cause may Under-investments stakeholders Infrastructure not developed in line with traffic growth, or in line with traffic not developed Infrastructure undertaken unnecessary investment Customer feedback and inputs not incorporated in the and inputs not incorporated feedback Customer development in inefficient plans, resulting development Recovering CAPEX investment over term of concession rather rather of concession term over investment CAPEX Recovering and customers in current resulting of asset, life than useful long-term infrastructure for paying consumers and associated of dispute than resolution rather Escalation service disruption Transition and handback issues leading to interrupted interrupted and handback issues leading to Transition period during the transit operations • • Airport be restricted and capacity may growth • levels service and inadequate in inefficient operations • Results of the airport growth restrict • May • • Lack of incentive to develop CAPEX in final years in final CAPEX develop to • Lack of incentive • • • Issue Limited penalties for under-investment and incentives to delay delay to and incentives under-investment penalties for Limited investment Overly-rigid capital investment plans and poorly defined capital plans and poorly defined investment capital Overly-rigid triggers investment Lack of consultation and governance process for capital capital for process Lack and governance of consultation expansion Limited incentive for late-life CAPEX late-life for incentive Limited Limited dispute resolution processes resolution dispute Limited Limited provisions for smooth termination and transition smooth termination for provisions Limited 74 Balanced Concessions for the Airport Industry

Appendix 4.

Qualitative Bidding Framework 75 Balanced Concessions for the Airport Industry

Brief for Pre-Qualification Process C. For the first phase of investment, a clear understanding of the design and development Bidders should be provided a detailed brief to provide process, costs, and timeframes to demonstrate as much certainty as possible. At a minimum this should capability in this area. Specific elements to assess cover: could include:

• The available land with details of any feasibility • Capacity review study studies or blighted areas • Different steps of the consultation process with • A clear planning framework, i.e. national, local planning users to secure their buy-in rules, environmental or airspace considerations • Planning permissions • Government aviation master plan / aviation strategy • Design process including Concept, Options, • Government assessments of national traffic demand and Detailed design • Surface access strategy • Environmental assessments • Basic user operating requirements • Deliverability of capital program and • Defined user consultation strategy to develop risk mitigation plan infrastructure, monitor performance, and trigger • Procurement, construction, operational planning feasibility for new investments and commissioning • Clarity on planned regulatory framework to be defined • Lead time required to develop the new prior to procurement and adopted by bidders infrastructure including airfield, terminal and cargo (speed of delivery) Elements Supporting a Technical Bid Evaluation D. Key design parameters including: IATA advocates for bidder technical proposals to cover a range of areas which should be evaluated, in line with • Design specifications such as passenger Levels of the Airport Development Reference Manual (“ADRM”), Service i.e. IATA Airport Development Reference including: Manual (Optimum) • Parking stands and levels of “pier service” (contact A. A detailed long term traffic forecast that should versus remote stands) clearly indicate: • Operational performance such as runway utilisation, average taxi times • Passengers in millions per annum and in the peak hour with additional detail for the first phase of E. Flexibility and efficiency in design and operation, development including: • Air traffic movements in thousands per annum, and movements during the peak hour with additional • Modular build sufficiently flexible to accommodate detail for the first phase of development fluctuating traffic forecasts over time and changes • Cargo in tonnes per annum in new technology • Concept of operation Traffic forecasts should clearly indicate the demand by • An assessment of how the building will be used, traffic type, and plot demand triggers for investment. as well as its cost and planning parameters is This should illustrate how bidders intend to apply the essential to implement cost efficiency framework provided to them regarding demand triggers. • Alignment of design to target quality/service

B. An airport land use plan, draft master plan and Short-listed bidders should develop a business case phasing strategy taking account of major airport to demonstrate a return on investment for users, and planning building blocks including: to ensure that functional requirements are embedded in airport capital investment plans. As part of the • Airfield elements – runway, taxiway, taxi lanes concessions terms IATA highly recommends governments • Airport terminal(s) oblige concessionaires to consult and agree upon the • Aircraft parking stands detailed design and service quality solutions required • Cargo facilities to deliver their requirements, during the airport design, • Fuel facilities development and construction stage. As stated, IATA has • Surface access developed specific best practice guidance to support • Support and aircraft maintenance facilities meaningful and effective consultation that works towards consensus, “Airport Infrastructure Investment — Best The most efficient use of the available land to meet the Practice Consultation”. This will help to select best forecast demand should be demonstrated, including that value capital investment solutions which deliver user it is aligned with long-term master plan. requirements. 76 Balanced Concessions for the Airport Industry

Appendix 5.

Glossary 77 Balanced Concessions for the Airport Industry

Abbreviation Meaning Abbreviation Meaning

A4E Airlines For Europe IRR Internal Rate of Return

A-CDM Airport-Collaborative Decision INR Indian Rupees Making ITM Osaka Itami Airport ACI Airports Council International KIX Kansai Airport ADP Aéroports de Paris KM Kilometer ADR Aeroporti di Roma KPIs Key Performance Indicators ADRM Airport Development Reference Manual LPVR Least Present Value of Revenues

AdT Aguas del Tunari MEAT Most Economically Advantageous Tender AIA Athens International Airport MOP Chile’s Public Works Ministry ANA Aeroportos de Portugal NGOs Non-Governmental Organizations ASLA Airport Service Level Agreement O&M Operations and Maintenance BLR Kempegowda International Airport, Bangalore OPEX Operating Expenditure

BOO Build-Operate-Own ORAT Operational Readiness and Testing

BOOT Built-Operate-Own-Transfer OTP On Time Performance

BOT Built-Operate-Transfer PPP Public Private Partnership

CAA Civil Aviation Authority PSE Passenger Sensitive Equipment

CAPEX Capital Expenditure PSP Private Sector Participation

CIDCO City and Industrial Development QCBS Quality and Cost-based Selection Corporation RAB Regulatory Asset Base CSIA Chhatrapati Shivaji International Airport REPEX Replacement Expenditure

CUTE Common-Use Terminal Equipment ROI Return on Investment

DBFOM Design-Build-Finance-Operate- ROOT Rehabilitate-Operate-Own-Transfer Maintain SCL Santiago International Airport DBO Design-Build-Operate SLA Service Level Agreement ENAC Ente Nazionale per ‘Aviazione Civile SPV Special Purpose Vehicle ERA Economics Regulation Agreement TOOO Rehabilitate-Operate-Own ESG Environmental, Social and Governance TSA Transport Security Administration

GPUs Ground Power Units TTIA Taiwan Taoyuan International Airport ICAO International Civil Aviation Organization UK United Kingdom

IGIA Indira Gandhi International Airport WACC Weighted Average Cost of Capital 78 Balanced Concessions for the Airport Industry About Deloitte

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